All right. I think we're gonna get started here. Good morning, everyone. Welcome to day one of The Flagship Morgan Stanley TMT Conference. My name is Erik Woodring. I'm the hardware analyst here at Morgan Stanley. I'm delighted to be joined by Enrique Lores, HP's CEO. Before we get into that, a few disclaimers. From the Morgan Stanley side, for important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosure. If you have any questions, please reach out to your Morgan Stanley sales rep. On the HP side, today's discussion includes forward-looking statements that involve risks, uncertainties, and assumptions, which are further described in HP's SEC filings, including HP Form 10-K and 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statements. For more information, please visit HP's investor relations website at investor.hp.com. Perfect. Thank you. Enrique, thank you for joining us. Obviously a 30-year veteran of HP. You've led the business or led the company since November to 2019, I believe it was. Mm-hmm. A lot to get into. Maybe we just start. Yo u reported earnings last week. You, you are now, three months past your fiscal 2022, and so maybe just provide the group an update on the demand landscape by business segment, and maybe what's changed since the end of your fiscal 2022 close. Sure. Sure. Thank you for having us here. Of course. I think the first thing about the earnings last week is that we did exactly what we said we were going to do. We delivered on the EPS guidance that we had provided. We won't share in the segments where we thought we needed to grow because of profitability. We delivered on the cost goals that we had announced a quarter ago. In terms of demand, we saw some trends that are a continuation of what we saw in before. A few new things. What didn't change is that we continue to see weak demand on the consumer side. We started to saw that mid last year. It has clearly continued as we start 2023. What was new is that we saw also a weakening of demand in the enterprise corporate space. We think this was driven by corporations and enterprises becoming more conservative in terms of how they manage their budget, how fast or slow they hire new people, how fast or slow they refresh the equipment that they have. We continue to see good momentum in terms of new deals being open, RFQ, RFQs being open, winning RFQs. Where we have seen a change is in how fast these deals are translated into orders. Probably the last thing worth mentioning is the situation on inventory on the PC side. Mm-hmm. Where we had said a few quarters ago that inventory in the industry was high. We saw a reduction of inventory. We think this is going to continue at least for another quarter, but this is clearly having an impact also on how many units we ship. Right. Every quarter. Okay. I think maybe what's helpful is to separate kind of the macro from the micro. If we just start, again or building off of that what do you see in terms of the macro environment? What are you hearing from customers? Maybe just elaborate on some of the comments that you just made, especially in the enterprise about deals and the longevity of deals or being pushed out or new deal momentum. Just double-click on that. I would differentiate what we hear on macro and micro. On the macro side, clearly corporations are being concerned about what the environment is. Clearly, there is not still a solid view on when or how the current economic downturn is going to finish, and therefore, overall, I see conservatism in terms of how to manage the budget during the next quarters. That's probably the key thing to highlight from the corporation side. On the micro we see, and especially in our categories, we see what we call hybrid work clearly becoming the prevalent way of corporations to work, which is a big opportunity for us, both medium and short-term, as soon as the economic situation finishes. Most corporations are going now through the discussion of how many days are they gonna be asking their employees to work, which again, as we provide equipment both for home and for the office, is a good opportunity. Most corporations are investing in video conferencing rooms, which we see a big long-term growth opportunity for us. Also the fact that the refresh of the current install base is somehow being delayed also opens up an opportunity for us medium to long term. Impact on the short term, but still very positive trends on the medium and long term. Okay, perfect. That's a great starting point, big picture. Let's get into some of the segments. Start with PCs. Mm-hmm. I think those are top of investors' minds right now. Last week you guided to PC market units down, let's call it high teens in your fiscal 2023. You mentioned about the immersion of the emergence of enterprise weakness. Again, help us understand consumer versus commercial. Does one market potentially bottom before the other? Do you see greater, more significant declines in one versus the other? Is one more resolute than the other? Just help us think about the strength or maybe the recovery that you could see in either of those markets. I think in terms of segments, the expectations at this point are very similar. What we shared last week is we don't expect a recovery of the economy this year. This is how we are building our plan, because we think there's still a lot of uncertainty. Of course, we'll continue to work with multiple scenarios, worst scenarios, better scenarios. This is why our guide for the year, which we didn't change... Mm-hmm. remains broader than what we had done or wider than what we had done before. let's say for the midpoint, we wouldn't expect a recovery. In terms of, especially on PC, the situation on channel. E-channel is elevated in both sides. Mm-hmm. We expect that the correction of channel is gonna be impacting both businesses. I think what is probably important to highlight is we see what we call sell out, so shipments or sales to real customers versus shipments to the channel are being stronger. Mm. Because the channel is being reduced, which means that real end customer demand is stronger than what the current numbers have reflected. Right. That's one of the reasons why we think that as the channel situation will be corrected in the second half, we will see stronger shipments than what we saw in the first half. Right. That was gonna be my next question. We've heard it from the industry, we've heard it from some of your competitors, kind of the second half should look better than the first half. We're working down channel inventory. Mm-hmm. Sell-through is better than sell-in. Is there any way that you can help us think in terms of how much better sell-through would be than sell-in? Are there any other factors that you see today contributing to a stronger second half? Like, are there any green shoots emerging, or is it seasonality? Help us gain confidence on why the second half, besides general inventory, should be better than the first half. I think there are probably two factors. One is general inventory that, as I said, it is being reduced. We expect it to continue to be reduced and reach a normal situation by the end of Q2 or early Q3. That's our current view. This is an industry-wide situation. This is why it's harder for us to predict exactly, 'cause it's not only us, really depends on how the industry is going to be moving. I think in terms of why the second half should be stronger, one is general inventory. Second is normal seasonality. Especially from an end user perspective, usually second half is stronger than the first half, we expect that this will be reflected in numbers. The other positive thing is if we think, for example, the situation in China, Mm-hmm. They have performed better than our most conservative scenarios. We shared that in the November call. There were multiple scenarios we were considering in China. We were concerned about the reopening and the impact that the reopening was gonna have in the impact of COVID, and how many people were gonna be getting sick. We didn't see a big impact. Right. This was very positive for us compared to the plans, and we think that this will also could be another area of upside for the second half. Okay. The first two are the more relevant ones. I guess maybe it's also fair to say if some of your enterprises are not canceling, but delaying or pushing, if that is reignited in the back half, that could be something that helps you as well. This is why, again, if I think about the medium long term, we remain optimistic about the overall PC and our extended personal systems business. Right. The install base now is bigger than what it was pre-COVID, significantly bigger. There is a whole refresh to be done in the enterprise that has not been done yet. Mm-hmm. This is a demand that at some point will be coming. We don't know when. Right. It could be take longer or it could take shorter, depending again, almost more than anything on expectations, but demand is there. Right. I think it's an interesting point you make because we've talked a lot about the near term, but if we look two or three years out, there's an argument to be made that the industry PC TAM should be bigger than the pre-COVID TAM, whether it's mix shift to notebooks, whether it's a larger install base. Do you agree with that? Maybe just help us understand, again, I know you don't have a crystal ball here, but what are the reasons that the PC TAM in a post-COVID world could be bigger than the kind of annual run rate pre-COVID? I would say there are probably 3 big factors. One is demographics, and I strongly believe that over time there are more PCs and more need to computers in the world just because more people will be getting access to that. That's a very important factor. Secondly is what we were talking before about hybrid work. Clearly this is having a positive impact on the overall category. It's driving not only more devices, but also devices with better specs. In our case is very important. Even if this year the total number of PC shipped probably will be close to what it was in 2019. Mm-hmm. From a revenue perspective, it will be a bigger market because mix is better. Right. Mix is better because what we are all using PCs for today, which is mostly for communication, is not anymore a device that you use to create your work, your documents or your spreadsheets. They have become central communication tools. You need better speakers, better cameras, better displays, this drives better mix, better, more expensive devices. That's another important factor. The fact that the install base grew so much during the last two years is another important tailwind for the category going forward. You kind of already just answered the question I'm about to ask you, but we could double-click on it, and that's just I said this to you before we started. I've been surprised by the resilience of PC ASPs, or we could even call it revenue per unit because there is attach with services, there is attach with peripherals there. Y ou've alluded to some discounting and pricing aggression in the industry to move the channel, right? Even so, ASPs are holding up. Margins are holding up relatively well. Again, maybe if you could just help us understand some of the factors I think you just mentioned, but what are those factors that are keeping pricing higher today than pre-COVID? Do you expect that pricing goes back to pre-COVID, or have we reset to a new level and can continue to grow from there? If we look at the broad ASP definition, I will follow what you were saying, clearly there has been an improvement from pre-COVID, we expect that this will continue. This is why about a year ago or a year and a half ago, we increased our expectations of margin for the business to 5%-7% to reflect that. I think there are two major drivers of that. One is what I mentioned before about average selling price per unit being higher because the configuration being, let's call it richer. Better memories, more memory, better displays, better screens, better mics. We see a shift in the type of PC that we are sold. Second, because we also have an opportunity to improve what you were calling attach and selling our PCs with a full configuration for our customers. Whether this is services, more better care packs, more configuration from the factory, whether this is more peripherals for gaming, for hybrid work, there is a big opportunity for us there. Yep. which is aligned to the growth strategies that we have been executing. We clearly see this opportunity to grow in all these categories where our share was low. Mm-hmm. Categories that because of hybrid work or gaming are gonna work and are gonna grow in the future. Therefore, also this will help to improve the overall ASP and the overall margin of the category. Right. And I was just gonna Before we shift into printing, I just wanted to ask about Poly. Obviously, you made the acquisition last year. Really enhances your hybrid, your hybrid offerings, let's call it. Just an update, how is Poly performing kind of relative to your expectations? Anything changed in terms of the insight or outlook that you have for that business? Then the integration I assume is largely there. Is that a fair thing to say? Let me start on integration. Sure. I would say integration is going well. We are not done yet. Mm-hmm. Because we have integrated functionally, but now we need to integrate from a system perspective, which always takes more time, and it will still take us a couple of quarters, two or three quarters to complete. It's work to be done, but I'm really pleased with the work that the team has done and the progress we have made. From a market reaction, I think that it could not have been more positive than what it has been. Whether it's feedback we get from customers, feedback we get from resellers. They see the opportunity in the integration of the two portfolios. They see the advantages that we are gonna have now from a go-to market perspective. Mm-hmm. I think the reaction has been very positive. As I was mentioning before, no changes in the long term. Right. Especially on video conferencing rooms, which was one of the big drivers of value that we saw. As I have shared before, our estimation is that in the world there are around 90 million meeting rooms. Mm-hmm. Our estimation is that only 10% of them have video conferencing capabilities today. In a hybrid way of working, it's not difficult to envision a much higher penetration of video conferencing rooms. We do our own earnings call back on video. We didn't do that pre-COVID. Exactly. This is a trend. Again, anytime I talk to a CEO, all of us are investing and changing the systems. Right. This is gonna be an opportunity not only in the short term, but an opportunity for many years. Because penetration will grow. Mm-hmm. Also we know how painful it is still today to have a conferencing room, a video conference where a few people are in the room, a few people are connected, they don't see the body language of what happens in the room. It takes 10 minutes to make the mics work, the speaker work. Yep. that's a big opportunity for innovation. This is why we are excited. It's not only the term- Right. also the innovation we are gonna be able to bring. Right. The upsell, so to speak. Let's shift to printing. Maybe if you could just, what's your general message in terms of printing markets? Then maybe if you could elaborate across home versus office versus graphics. What's most interesting, what's different? I would say first, compared to PCs, the print market has proven to be more resilient and more stable, as proven in the decline, in the significantly smaller decline that we have seen, even as we go through the current situation. I think that differentiating segments, we have categories that the market category continue to grow, like graphics. Even if this quarter we share that we had not seen growth, we really continue to see the opportunity to grow on the long term. The office market is really driven by the return to office, and I would call it uneven. Mm-hmm. There are countries where return to office has happened and in a much more significant way than others. Mm-hmm. Also within some countries, there are some states or regions where the return to office is going slower than others. We are sitting in one of the areas of the world where return to office is happening the slowest. Yeah. This is the nature of this area. On the, on the home side, as we have shared before, it's a category that overall is declining. Mm-hmm. The projections that we have now are better than the projections we had pre-COVID. Again, driven by the fact that more people are working from home, and that the utilization of printers at home is now bigger than the projections that we had if they were gonna be three, four years ago. Right. That's kind of the, that's kind of the summary. Right. And then I think the other important part when we're talking about your printing business is the strides that you've made to decrease your reliance on transactional supplies to reduce the mix of unprofitable customers. You've really increased penetration of HP Plus, of Instant Ink, of big ink sales. I wrote this down, in the January quarter, 56% of your print shipments were HP Plus and big ink. W here are we on this kind of transition to this kind of new business model, so to speak? How are your competitors reacting to that? When you have customer conversations, what do you hear in terms of the competitive landscape relative to the shift that you're doing? Sure. Two things. Before I forget. Another difference between PCs and print is the situation on channel. Mm-hmm. Because of the supply chain restrictions or limitations that we still have, from a channel perspective, there is no inventory to be corrected on the print side, not on hardware and not on supplies. Both are at fairly healthy levels. Okay. I think that you touched on something really important because one of the biggest announcements we made almost four years ago was this transition of business model. We have delivered on what we said three years ago. It was a big change because we had too much dependency on supplies profitability, and slowly but surely, we have been shifting that. I think the proof is that even in quarters where we see significant decline of supplies, our pre-margins continue to be. Amazing. fairly strong. I think that, again, we have made good progress. Still there is more room to go. Mm-hmm. I think the percentage of both, especially big ink, big tank, big ink, big toner and Instant Ink will continue to grow. Instant Ink, we shared, was growing double digit the number of subscribers. For the first time, we're above the 12 million subscribers, which is a good number. Our strategy has not changed. We continue to see the opportunity to reduce unprofitable customers, and we continue to drive HP+, big ink, big toner and Instant Ink. Let's touch on two points that are important. One is just supplies. You've guided this year's supplies down low to mid-single digits in constant currency. Is that how... you're kind of it's a bit of a tale of two halves, where maybe the first half might not look similar to the second half. Is that how to think about supplies as we think over the next two to three years, or are there any changing dynamics that would support a different rate of decline or growth? Yeah. We have not changed our guide for supplies. I think we shared that in our last investor day, which is almost now 18 months ago. We still think that it's mid-single digit decline. That's what we see happening on supplies. As we said before, we don't need supplies to grow to deliver the OP goals that we have for the business. We said that, and we are demonstrating that every quarter. The dynamics have not changed. It's impacted by the evolution that we see in the different businesses, both the shift toward hardware profitability and the implications that this has in supplies, because when we shift units to big ink, big toner- Mm-hmm. this has an impact on the, on the supply side. Also, when we shift a customer from buying transactional supplies to Instant Ink supplies. Mm-hmm. Even if that customer overall over time will be a more profitable customer for us, there is a short-term impact. Right. on the growth of supplies. It's a good impact. Right. because long term, we are gonna be able to create more value. Maybe the last thing on supplies, which has been also a very positive change during the last three years, is the fact that now we are growing our share of supplies for both ink and toner. Especially in toner, we shared three years ago that this was a challenge that we had at that point, almost four years ago now. We said that we were gonna be applying the same tools that we had been applying to ink, where we had been able to grow. We did that, as we shared, our share on supplies, both ink and toner is back. Right. Perfect. The other side of this coin is even though supplies is declining, your print operating margins are very strong. They're above the high end of your 16%-18% range. It's been like that off the top of my head, let's call it maybe five quarters in a row now. Mm-hmm. Again, help us understand why they're so much stronger and should we think about print operating margins as being structurally reset higher than 16%-18%? Or is 16%-18% still where we could see some normalization, for example, when supply improves and maybe there's a little bit more price normalization? Just walk through that. Let me start from the, from the end. Please. Yes, we have not changed our long-term guide for supplies. Sorry, for print. We continue to think it's going to be in the 16%-18% range. As you said, still today we have some favorable pricing, mostly on the office side because of still the impact that we still is seeing some categories on supply chain, and therefore, at some point, it will be normalized. Why is the operating profit so strong? I think there are two key drivers. One is the changes we just discussed about the change of business model and more profitability on hardware. The other important factor is the work that we have done over the last three years and that we are going to continue to do. Mm-hmm. on core structure. Mm-hmm. We announced our previous restructuring plan three years ago. We more than delivered on the goals that we have. We continue to see opportunities. This is gonna be a tailwind for both businesses. Of course, it has had also a positive impact on print. Right. Let's get right into that, because I think it's important. You announced Future Ready a little while ago. Clearly an important initiative at HP. I think what's helpful is maybe understanding what is a continuation of what you had already been doing, what is new, and then big picture how is HP going to emerge stronger following this plan than they did coming into it? Sure. Let me talk first about kind of the sources of. Mm-hmm. I will talk about why we will be stronger. Sure. In terms of sources of saving, we identified three. Number one is we have a big opportunity to simplify our portfolio. Something we did during COVID, as a consequence of all the component shortages that we saw, we increased significantly the number of SKUs. For every SKU, we had multiple boards to make sure that any component that we found, we were able to build a unit for. This was the right thing to do during COVID, now it's an opportunity for us to simplify and reduce costs. That's an opportunity that the team is driving very aggressively. Mm-hmm. Second big area of saving is the continuation of the work that we started on digital transformation. As I have shared before, during the last four years, we have been investing heavily in improving our digital and IT infrastructure. We completed, I think three months ago, the rollout of our new ERP system, where we have now one ERP system for the full company. This, I would say, is the basic backbone that we have now, and now we can go function by function, area by area, digitizing the processes, improving the efficiency. Mm-hmm. we are an old company, so we still have a lot of processes that are very people-intensive. Mm-hmm that we can digitize and really use to reduce cost. The third area of savings is what I would say in any large corporation like us, there are always opportunities to be more efficient. Every time you think I'm really designing the system to be as efficient as I can be, you said it before, I have been in the company for many years, there are always things that you can do better, always. That's another important area of savings for us. Once you build the rhythm and the ability for the team to do that, you keep finding opportunities. Right. Those are the sources of savings. Mm-hmm. Why the company will be stronger is because, one, we will be leaner. Also because we are using these savings to invest in what we have defined as a growth area. Even in a situation like now, we think it's important to continue to invest in the future. We are doing that. We are protecting the investments that we have in the areas where we think there is long-term growth of the company. Mm-hmm. We talk about hybrid systems before. We briefly talk about solutions and services, where we have now two focus teams driving, one for B2B, one for consumers. All these are areas where we see growth long term, and we are using some of these savings. Some of them are going to the bottom line, some we are using to protect the long-term investments. Okay. Okay. So we have. Sorry it was a long answer. No, no. We prefer that with a few minutes that we have remaining here, I think one question I got coming out of January quarter earnings was just kind of contextualizing your free cash flow guide. You reiterated $3 billion to three and a half billion dollars for fiscal 2023. W e're gonna see a lot of that come in the second half of the year. What are the most important factors that we all need to think about that really drive that ramp? K ind of help give the audience some confidence in why, that $3 billion to three and a half billion dollars is going to be achievable this year in spite of the factors that we've already talked about. Yeah. I think it's probably because of the factors that we have talked before. Perfect. Perfect. Perfect. Because the key thing is our free cash flow is really impacted by the quarter-over-quarter growth of PCs. As we expect the second half to be stronger because of the channel reduction that we are doing, this will have a positive impact on free cash flow during the second half. Second big thing is we also will see the impact of the savings that we're driving. They will have a we will see the result of that on net earnings, and therefore, that will be on free cash flow. Second, some of the majority or a big part of the cash that we will need for restructuring is going to be used in the first half more than in the second half. We know it's, let's say different from what it has been previous years. Mm-hmm. It's more skewed towards the second half. When we look at all these factors, we think that the guide that we provided is still the right guide to share with investors. Okay. Perfect. I guess we have, we have just about 30 seconds. I wanna give you kind of the dance floor here. W hat's the final word? Help us all understand what you think is really most underappreciated about HPQ today. I think if we look at the value. First of all, we continue to think that our shares are undervalued. Mm-hmm. If you think about the value that shares have today, and you do a DCF analysis or any type of analysis, at some point you need to assume that free cash flow is going to be declining to support the value that we have. This is true today, but for example, this was true also seven years ago when we separated, and we have proven that this was not the case. Revenue, operating profits, free cash flow have been growing faster, around 5%, and EPS even faster. We have clearly demonstrated that we know how to continue to extract value and to grow value from this business. We have done this before, and we continue to think that we have an opportunity to do that, to do it now. This is why the growth businesses are so important because this is where we think a long, big part of the future of the company or the future growth of the company is going to come from. That's a reason for us to believe that the company value will continue to grow. Just to close, we have also demonstrated that we are an investor-friendly company. We return 100% of our free cash flow to investors unless better opportunities show up. We have done that, and we will continue to do that as far as our leverage ratio is within the guidelines that we have provided. Cool. We're out of time. Enrique, thank you so much for spending the time. Thanks Erik. Good to be here. Awesome. Thank you. Thank you, guys.