Q4 2020 HP Inc Earnings Call

[music].

Good day and welcome to the HP Inc. fourth quarter 2020 earnings call.

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask the question to ask the question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over Tibet <unk> head of Investor Day.

Relations. Please go ahead.

Good afternoon, everyone and welcome to each piece of fourth quarter 2020 earnings conference call with.

With me today are and rigorous each piece of President and Chief Executive Officer, and Murray Myers, He's acting Chief Financial Officer.

Before handing the call over to Enrique Let me remind you. The this call is being webcast. A replay of this webcast will be made available on our website. Shortly after the call for approximately one year.

We posted the earnings release and the accompanying slide presentation on our Investor Relations Web page at Investor Day on H.P. Dot 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 and the earnings materials related to forward looking statements that involve risks uncertainties and assumptions for.

For a discussion of some of these risks uncertainties and assumptions. Please refer to H.P.S.P.C. 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. It reflects the estimates based on information available now and could differ materially from the amounts ultimately reported and Hps form 10-K for the year ended October 30, Onest 2020, and a treat 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 is and expressed on a non-GAAP basis. We've included reconciliations to the comparable GAAP information. Please.

Please refer to the tables and slide presentation accompanying todays earnings release and for those reconciliations of.

And now I'll turn it over to Enrique.

Thank you both on thank you everyone for joining the going through the <unk>.

Moving to remove from the difficult thing for so many of the world.

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Good day, or we regard our strong Q4 on the full year financial results on.

And I wouldn't be scarves and the graphic on progress of the game so on the volume.

And conform started.

Good and before we this thing for of Q4, where we drove the improvement relative to the third of worker and revenue operating profit non-GAAP de beers on.

Cash flow.

We are encouraged by the hearings with the improvement in our business, but we continue to navigate well going I mean, you can mark and vitamins.

For the of worker, we go lever of revenue of $15.3 billion flow.

All of you over the years in constant currency.

Non-GAAP EPS of 60 booths and up three per phone year on year.

And we generated free cash flow of $1.8 billion.

Well the Frisco 20, the spray bid on the Meek, we the lever on the full year non-GAAP you views on commercial outlook. We gave the word on of these days throughout the year.

[music].

For the full fiscal year, we believe of revenue of $56.6 billion on non-GAAP EPS of $2.28 in.

In addition, we generally the strong free cash flow of $2.9 billion.

And we return for free $1 billion to shareholders through share repurchase share from DVD, and when making appropriate the investments in the business.

Looking at the where performance two teams from both of the consistent across both print and perform on systems.

HPC roads on differentiated portfolio on leadership, our current consumer and commercial market mix of our company more resilient across the business cycle.

And secondly, our operational execution, including our disagree on pricing.

The cost reductions on to flow James fragility help us navigate in a very dynamic and vitamins.

On the bringing the boat you sort of purpose driven culture built on strong corporate values, our founder of used to say that the greatest compared to the the of and birch. He's doing the right thing for the worst time.

And our teams have lived up to this idea of throughout the tremendously difficult year consistently stepping up to do the right things for our business for our customers and our communities around the world.

This is who we other for company and I could not be more proud.

Now, let me turn to our business and review the programs, we have made the against our strategy.

We are advancing our leadership in our core markets on expanding our reach into profitable again sometime.

We are positioning our sales to the new markets with our technologies and IP per cent significant opportunities to create on scale of new business first overtime.

And we are transforming the way we operate on because the company with a focus on building out our cloud infrastructure and our digital capabilities, while reducing our cost structure.

Our progress can be seen in each of our business units.

The it was another strong quarter for personal systems with revenue of $10.4 billion and a record of 19 million units shipped.

We grew consumer revenue of 24% with consumer of premium up 29% and consumer displays and accessory up 15 million person.

And book revenue on unique more than doubled.

We exited the quarter, we signed the elevated backlog and continued to operate with component supply shortages, which are expected to constrain our growth through the first half of 2021.

And the PC is more essential to daily life than ever before on demand for our innovation remains strong.

We launched a range of new products in our core compute categories last quarter.

To meet the needs of professional creators and all of the Thats required uncompromising mobile computing performance, we unveiled our new the book Fury mobile workstations.

We also announced on new lineup of HP per book on HP Specter free 60, and we expanded our current book on mobile usage and client portfolios.

And of PC gaming and continues to searching popularity, we debuted a range of new Olin accessories, including the oldman frequency wireless headset oelman vector of wireless miles on older and spacer wireless keyboard.

These momentum in gaming and accessories reflect our broader focus on innovating and important of decency, including peripherals and services.

During the second half of this year, we introduced a number of new monitors to improve the work from home experience.

The including always on low blue light to reduce by strain on displays with the increased search capability.

And we expanded our services offerings, including a new device as a service bundle specifically designed to simplify life for small and medium businesses.

We expect to see continued PC unit growth in 2021, which we anticipate will create additional opportunities for us to drive profitable growth as well as grow the lifetime value of our installed base by road and in our ecosystem of peripherals and services.

Turning to print by I'm very pleased with the sequential growth in revenue profit supplies and unit shipments.

In Q4, the printing business generated revenue of $4.8 billion and operating profit of $713 million.

We delivered a strong quarter relative to the market conditions.

Corbett related effects on both supply and demand has continued to impact our print and results.

From a demand perspective ongoing demand for consumer hardware and supplies combined with disciplined pricing per day.

Essentially offset the declines in commercial print.

And from a supply perspective, while we began to replenish Stoke at our partners. We anticipate continued supply constrained on some consumer hardware and supplies fiscal years.

HP is outperforming its peers and remained uniquely well positioned given our leadership across both consumer and commercial print.

Our strong consumer business, it's a clear advantage for us as the shift to remove the work and school continues to create momentum in home printing.

We also saw us on progress in commercial print driven by the SMB sector.

We expect a gradual recovery in the overall commercial print market.

The recovery may be uneven given the very in pace of economic recovery and the resurgence of Kirby the in team cases in some counties.

And we expect that the strength in home will gradually subside when more offices and schools free open.

We continue to evolve our print business models with our drive towards services and other rebalance of profitability between hardware and supplies.

Our incoming subscription business continued to see profit growth, we subscribers up double digits, surpassing our target of 8 million on enrollees.

We are making progress on rebalancing of the business model between hardware and supplies.

We are expanding profit up front with 69% unit growth on Cds or Big Inc.

We have improved consumer of hardware you year over year through selective price increases new product innovations and lower discounts and.

And earlier this month, we began the rollout of our much anticipated end to end platform strategy that we discussed at some last year.

Great free plus our into and system provides our differentiated value proposition for our loyal customers.

We plan to extend the HP plus across most of our home ASML office portfolio in developed markets as we rollout new products.

Together, we expect these actions will help us to optimize the business by reducing the number of on profitable customers.

We are also making progress against our plans to the rep industry with our technology solutions and 82 days medium to long term value creation.

While the industrial businesses of graphics on three the continued to be impacted by lower business activity due to the pandemic, we saw sequential improvement in both businesses as well as growth in strategic markets.

The labels and packaging for example, we had significant new systems wind at Empaque for flexible packaging and box maker for corrugated boxes and in patients and square meters increased double digits year over year.

And finally, we continue to shift our focus the were more into and solutions and higher value applications.

For example, this quarter, we launched a new tooling solution to the is that the molded fiber package and sector.

Most of that further packaging covers thousands of products ranging from food and beverage containers to packaging for household goods and consumer electronics.

We are excited for the deserve the potential in this sector as our innovative technology opens up entirely new possibilities.

We are doing all of this while transforming the way we work to unlock value and become a leaner more digitally enabled the company.

We have delivered on the foundational milestones that we outlined the previously and we are well ahead of our cost savings target this year.

We have significantly reduced structural costs.

Of and productivity savings and the enabled enhance digitization.

Murray will go into more detail in a few minutes.

And we are still in the early days of our transformation.

On the progress we made in fiscal year 20 is indicative of the opportunities we see in fiscal 21 and beyond.

These will remain a big area of focus and we continue to drive these I'll turn formation and efficiency across the organization to position the business for growth.

Let me sum up by reiterating the strength of our position as we enter fiscal 2021 on.

Powerful blend of innovation and execution is driving our business forward.

We have a diverse and resilient business model are leading in our core market investing appropriately in attractive growth opportunities on taking the steps necessary to transform for the future.

We remain committed to generating strong cash flow and to value, creating capital allocation relative.

This includes our robust share repurchase and dividend program and disciplined organic and inorganic investments.

We will continue to lead with our values of Makena sustainable impact in the world, including stepped up efforts to support diversity equity and inclusion on.

The world has to reduce our environmental footprint and mitigate the growing threat of climate change.

These are business imperatives, where we have a deep and unwavering commitment.

Before turning the call over to Marie let me share some details on her background.

Murray is both of our Chief transformation officer on our acting CFO.

Chief of veteran of HP, having heard on number of leadership positions at the company including of our controller.

Prior to returning to HP earlier this year, she will the CFO of Uri path.

And as Chief transformation Officer, and leadership has been integral to the cost savings we have delivered over the past year and.

Really grateful to have per leading finance through this transition.

I'll now pass the two Murray to review the financials.

Thank you and we gave for the kind introduction, it's great to be with all of you today.

Q4 was the strong finish against the tough 2020 backdrop with that said our performance reflected the company's multiple profit leathers solid execution and resiliency.

Before diving further into Q4, let me quickly recap and flight 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.

The year since separation.

We generated $3.9 billion of free cash flow above our full year guidance.

And we returned $4.1 billion on 105% of free cash flow to shareholders.

Importantly, we 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 of flat in constant currency.

Regionally in constant currency Americas increased 4% EMEA.

EMEA decreased 1% and HPG decreased 6%.

Gross margin was 17.6% down 1.4 points year on year.

The decline was due to the combination of a higher consumer the next within both personal systems and print hardware and low rate in commercial print.

Non-GAAP operating expenses were $1.6 billion down $169 million the.

The decline and operating expenses was driven by our ongoing cost efficiency program as part of our transformation efforts as well as the reduction in discretionary costs.

Non-GAAP net Oh, I any expense the $60 million for the quarter.

Non-GAAP diluted net earnings per share increased 3% to 62 cents with the diluted share count of approximately 1.4 billion shares.

Non-GAAP diluted net earnings per share exclude the net expense totaling $167 million related to onetime defined benefit plan settlement charges amortization of intangible assets restructuring and other charges and partially offset by non operating retirement related credits and.

The other tax adjustments.

As a result, Q4 GAAP diluted net earnings per share was 49 cents.

Turning to segment performance.

In Q4 personal systems benefited from solid demand related to working and learning from home with revenue of $10.4 billion.

Flat as reported or up 1% and constant currency on.

Our topline remain constrained due to industry wide supply shortages in CP use and panels.

Drilling into the details we saw the differing results by customer segment, the consumer revenue up 24%, while commercial revenue was down 12%, but.

By product category revenue was up 18% for notebooks that 28%, the desktops and down 45% the workstations the.

Change in mix reflected the strong demand for notebooks, mainly and chromebooks, which represented 20% of our total personal systems units, that's working and learning from home and continued.

Personal systems delivered $528 million and operating profit and operating margin of 5.1% in line with the outlook and at the high end of our long term range of 3.5% to 5.5%.

Our results reflected the impact of the higher consumer segment mix within our portfolio and lower commercial rate, which were partially offset by cost reductions.

Imprint on results reflected strong execution and the team's agility as we continued to see a trade off in demand between home and office print due to the pandemic.

Within commercial off the sprint, we did see some improvement driven by SMB improve.

Importantly, he remains uniquely well positioned in the print market by being a leader across both home and office with portfolio debt the resiliency to navigate these on certain times.

Q4, total print revenue was $4.8 billion down, 3% nominally and 2% and constant currency like.

By customer segment consumer hardware revenue was up 21% with units up 18% and commercial hardware revenue was down 22% on a 10% reduction and units.

In total hardware units were up 14% to 11.8 million units a record since we became a separate company.

Supplies revenue was $3.1 billion flat in constant currency in the fourth quarter lower commercial printing was offset by consumer demand due to work and learn from home and disciplined pricing as well as replenishment of stock at our channel partners and product availability.

The improved.

Tier one channel inventory levels remain below the the ceiling.

Current operating profit was $713 million and operating margins were 14.8%.

The year over year decline was due to lower commercial print hardware rate and strong consumer hardware shipments, partially offset by strong supplies the performance and Opex reductions.

Now, let me turn to our cost savings and transformation efforts.

We finished F Y 20 ahead of the first year cost reduction target, which is 40% of at three of $1.2 billion gross run rate structural cost reduction plan.

During the dynamic environment, we are also reducing discretionary cost as much as possible, even though they are more temporary in nature.

To illustrate we've seen significant operating expense reductions throughout the year with Q4, non-GAAP opex as the percentage of revenue at 10.7%.

We are focused on continuing to dive deeper into our transformational efforts.

As an example, and Fytwenty, we have taken site optimization actions by exiting of the 30 real estate sites to align with the location and the ability strategy.

In addition, we have seen efficiency improvement in our customer service and support driven by our continued shift to digital which resulted in an over the 300% year over year increase and virtual agent interactions and the second half of 2020.

Finally, we continue to make progress and our new part the program amplify, which we announced last quarter to enable enhanced data analytics and provide partners with the capabilities tools and insights required to capitalize on opportunities across the portfolio.

As we head into F. Y 21, we are focused on third the digital enablement and driving a lean cost structure, because we believe it enables top and bottom line growth.

Shifting to cash flow and capital allocation.

Q4 cash flow from operations and free cash flow was strong at 1.9 billion and the $1.8 billion respectively.

The stronger than expected cash flow was driven by higher earnings and contributions from working capital.

The Q1, we expect the free cash flow to be softer than Q4 in line with typical seasonal patterns.

In Q4, the cash conversion cycle was minus 30 days the.

Sequentially, the cash conversion cycle was flat as normalized purchasing and sales drove the decreases in days of inventory and days sales outstanding offset by decreases in days payable outstanding.

We wish her and $1.3 billion to shareholders through share repurchases and $238 million via cash dividends and Q4.

For the year, we have returned a total of $4.1 billion, which represented 105% of free cash flow and the year over year increase of 22%.

Today, we announced that we are increasing our dividend by 10%.

Looking forward, we expect to continue buying back shares at elevated levels of at least a billion dollars per quarter in the coming quarters.

Heading into Q1 keep the following in mind related to our overall financial outlook.

We expect macro economic conditions to be more uncertain as the impact of the COVID-19 pandemic continues to evolve.

Turning to specific personal systems assumptions.

Backlog remains elevated and the higher than the previous quarter that we expect industrywide CPQ panel and semiconductor constraints to continue to negatively impact the ability to meet demand and.

Especially for notebooks, which will constrain topline growth.

We expect continued strong demand and consumer and education pressure and commercial, particularly desktops and workstations.

We expect the cost of the overall basket of commodities to be similar to Q4 levels and from a margin perspective, we expect Q on operating margins to be similar to Q4.

In printing from the demand perspective due to the pandemic, we expect to continue to see the positive demand the home printing offset by more competitive pricing and hung printing as well as continued economic pressure on commercial printing.

We expect to continue to navigate the supply constraints of the focus on appropriately replenishing stocks and that our partners are well positioned to satisfy demand.

We expect the operating margin for Q1 to get into the long term range of 16% to 18%.

Taking these considerations into account we are providing the following guidance the Q1.

We expect first quarter non-GAAP diluted net earnings per share to be in the range of 64 to 70 cents.

And first quarter GAAP diluted net earnings per share to be in the range of 58, the 64 cents.

And now I would like the had back to the operator and open the call for your questions.

And we'll now begin the question and answer session and ask the question you May Press Star then one the on your touched on phones.

We are using the speakerphone, please pick up your handset before pressing the keys.

And would try a question. Please press Star then sales.

Our first question today comes from Katy Huberty with Morgan Stanley.

Thank you good afternoon, and congrats on the quarter and the recovery and printing revenue was particularly impressive, especially the supplies revenue getting back to flat year over year and constant currency, but the operating margin was below your your long term range and you're talking about getting back to that 16 day.

18% operating range in the first quarter. So just curious what what how the operating margin back and the fourth quarter and what are the factors, allowing you to expand margin sequentially going into the fourth quarter and the never thought or the first quarter, none of the follow up.

The thank you Kate and good afternoon, and so so let me provide you with some color around the print Opie rate in Q4. So first of all I'd start out the thing we had strong consumer hardware unit placements, which as you know have negative margins upfront cash.

Coupled with the softness and commercial parts of our business such as graphics, and three D combined with lower volumes and higher costs and we're absorbing those costs across the portfolio.

Uh huh.

The has been some volatility that we experienced and our supply chain, which resulted in some additional cost and the quota and also in areas such as logistics, where we had of and mix a higher mix of air shipments. So the the <unk> Oh P rate was also partially offset by supplies volume and pricing discipline and the.

In summary, that's what drove that decline.

In the rate in the quarter as we look forward to Q1, and they're also the headwinds and Tailwinds on cost and we do expect that there will be some higher logistics costs, particularly and we're using a sort of a stronger mix of air but we do have some one time.

Related cost and supply chain costs, and we expect will be lower going into Q1.

Okay, Great and then I appreciate you don't guide the of 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 and.

Thank you. Thank you. Thank you for the question, we expect most of the trends that we saw in Q4 to continue during Q1. If you look on the 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.

Right and we also expect some of the limitation on had with half of our supply chain perspective, because of of availability of components to stay on this through the first half of next year. The thought of that kind of the key terms from the revenue side.

Thanks.

Our next question comes from Toni Sacconaghi with Bernstein.

Yes. Thank you you commented on 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 the 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 and supply.

For channel partners largely centered in the U.S.

And I have a follow up please.

Hi, Tony Good afternoon, and thanks for your question the yeah.

The team specifically around the supplies channel inventory. So there are a few drivers of this two different things going on on the quarter. So let me give you some context here. So that's the first of all consumer demand as you know is being driven by this whole work and one from home and due to the cold and pandemic. Some of it was offset by lower commercial printing.

But in addition, we had better discipline and pricing in the quarter that was significant and.

And the put it in context of <unk>, the worst supply chain disruptions that we experienced earlier in the pandemic and we've been doing some replenishment of of stock and kind of 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 a and just in closing finally.

In supplies me up the low ideally, where we'd like to be in terms of being below our ceiling on channel limits, the and maybe I'll turn it over to regain to get some context about the arts and then.

Let me address your or you're going up on until we got the study because when we look both are the.

The and cleaners, and both hardware and supplies and.

Our performance this quarter was most of the more driven by supply chain than before the end by demand. We are still limited in several of our and many of these categories from a supply chain perspective on the performance defenses and you show that you saw our current regions were driven by how we allocate the product no buy when the.

No by way of demand was coming from we've had very strong demand on the consumer front for consumer for Pcs on for printers on every geography of the world.

Okay. Thank you for that and.

Kind of use my follow up to push a little bit on my first question.

You know the supplies growth rate going from.

Minus the high teens to essentially flat seems extraordinary and it almost feels like a in prior quarters.

You true down channel inventories of that exacerbated how poor supply was because you didnt have availability and this quarter you replenish debt.

And all the 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.

And when we look to 2021, what is the realistic supplies growth rate for the year.

<unk>. Thank.

Thank you. Thank you for the Great company as you know we are not guidance anymore on supplies, but let me give you some color that they think will help you to understand the mode. NAV broad word my day was fix and then explaining before the in Q2 and Q3, we experience and supply chain shorts and does that reduce our ability to <unk> to supply the mine.

And too many of our give the center and is definitely during Q4.

Demand for has continued to be very strong on the consumer side and resellers have the plan is theres talk 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.

These consumer demand is really driven by people are working from home and kids learn and from home, which was nothing is going on a continuous thing for a few quarters, which is one of the reasons why now why the guide for Q1 was stronger than than what market was expecting because we expect to see the used to continue happening and finally and.

Other element of the performance into price this quarter was the discipline in pricing that we drove the.

You probably have noticed that given the availability issues. We have removed promotions that are very few promotion and scrap anyways, we stage be supply and the combined with very disciplined pricing with our current the world has also had a positive impact on revenue on supplies revenue this quarter and again some of it we continue with respect to continue.

In Q1.

Our next question comes from and that Star your non <unk> with Evercore.

If thanks for taking my question the congratulations on the nice print quite literally the from you guys. Oh I guess my first one is on free cash flow of the other performance you're thinking October quarter, certainly much better than what most of us and modeled ups I'd love to understand and a hot and October quite of free cash flow stock up versus your expectations and I guess when I.

Think about the underlying levers behind the free cash flow was the 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 we on the free cash flow trends and any sense on how we should think about.

Qualitatively or quantitatively about fiscal 21 free cash flow.

Sure and good afternoon, and look up the trial start up by saying look we're really pleased with our results here and and and what we saw on the quarter. As you know, we drew 1.8 billion free cash flow and Q4, and 3.9 and F Y 20, and and it was the record actually on a single quarter since the split so that cash flow strength that you saw was really.

The stronger than expected due to higher earnings and and frankly, the benefits of of working capital, particularly and an inventory and a P and and as you know as we look forward in the 21, you know I I just you know keep in mind that and typically at Q1 cash flow is usually lower given normal seasonality.

But the key and what he was saying the key drivers of free cash flow and Q4, where the strong earnings and we had and the benefits on working capital that it really in many cases driven by the strength of our personal systems business, but we have commented before and we are very pleased not only with the results of Q4, but really.

The way the results of the full year, where we have the reverse the cash flow the free cash flow that we.

Expected to see before the pandemic and that we share 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.

Lots of the sudden I mean is there a bigger share gain dynamic or even a better mix dynamic as you know 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 works is not up so could you just maybe talk about is the mix shifting and that's perhaps giving you better sustainably for supplies as we go forward flow.

And just got better sense of that Yeah. Let me, let me explain the dynamics that we've seen in the pre insight. When you know we have to some be of Methazine imprint commercial and consumer and I were our consumer business is getting a lot of benefits from people working from home keep learning from home on the has driven our strong demand.

For printers and strong demand for supplies usage is how both the expectations and we had before the dynamics of that and it is clearly having a positive impact in our business on top of that you know the <unk> you know our competitive position is relatively stronger in the home side, we have higher share of printers.

Hi, your share of supply higher share of pages, so and more demand goes to consumer and to home, we clearly cannot get the benefit from that on.

On the commercial side, we continue to see the impact 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.

Thank you very much and congratulations on the results I just have one question and you can just you know answered any money you want but the average life of the PC and also printers and used to be kind of a pretty consistent I believe around four years.

Now that we're in a world of kroner virus and splitting time from Sky.

The 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 are using it in two different locations or how should we think about that as we go forward.

The me, let's turn to share both for what we are we seeing for both pieces on print you know the catch on Pcs more than the life of diffused changing hardware. Siemens has is having significant increase in the demand of Pcs Pcs have become essential people needed for working for learn name for the.

Day mean for entertaining for communicating and the trend and we see is that for every person to have their own PC and the he really driving significant demand on the PC side.

On the printer side or the way. It's happening is both were seeing the additional demand for home printers as people on the kids are living and working from home, but and we have also seen an extension of the life of printers because of People's needs to print. They are taking Trinidad haven't of being used for awhile and they are buying.

Supplies for them and they are using them. So you could position on this as an extension in the life of the printer, which for US of course is a very positive impact because mean, we allow people to enable people to breed without having to embed in the environment and you printer.

Right, but my question is what's the everyone has the PC at home and the PC and work. After this is passed any thoughts on the life of the PC after that and essential purchases and made you think those kind of still be the same light or shorter or longer.

I think we are still far from from that position, Jim which is far from everybody having access to a b C and every and each of the countries where do we do business. So we this is why we are confident that the demand for Pcs and where I remained very strong during the next quarter or the same same and how many of US have you are saying.

We're seeing the so much need for Pcs and pieces have been refurbished on Pcs have been years, So which you could position us on extension in the life of the disease, but we see the that are more short term effect, what is really driving the mine and there is no way to go is the demand for every person to have their non PC.

Our next question comes from Shannon Cross with Cross research.

Oh, Thank you very much I wanted to ask about your graphics and Threed printing business. I think you mentioned on the call that it when its remaining weak which is one of the impacts and operating margin and the pension business. This quarter of and how are you thinking about a rebound there what are you hearing from customers in terms of their willingness to.

The last.

To take cash capital equipment, and make capital equipment purchases and perhaps maybe an update on your threed printing business in general and that the follow up thank you.

Sure. So yes, we share during the prepared remarks that both our industrial and graphics painting and see the printing of it all continued to be impacted negatively by the pandemic, we have seen companies throwing the on the investments in copies and equipment and in industrial equipment over on and these are the impact.

The as both business and what we have seen the only in many of the at the carriers and we have the fine for those businesses significant growth. We're seeing significant growth for example, the labels and packaging, where both in flexible packaging and corrugated packaging digest of ore or let's say squares the.

And the them so think of growing double digit year over year, which is a great confirmation that both got this business has had a long term opportunity even if in the short term is being negatively impacted by the pandemic.

And I would make similar comments for the three d. They embed many and peanuts is being impacted by companies, reducing the investment by the we continue to see the long term opportunity.

And we mentioned in our prepared remarks are very important introduction for us this quarter, because we had turned in the past that we see in the future that need to complement our BMS imprinted on supplies with the ownership of some end to end applications for high volume applications and with the launch of of solution.

To create tooling far more than fiber, we are starting to move in the direction, which will allow us to capture more value as cash them and we'll be able to do we see the printing scenes that were not possible to do in the past.

Thank you Okay and my second question is with regard to your new print model, the HP plus brand, which he just started to rollout I realize it's early but I'm curious since you out of the conversations are going with Staples and he you know any initial conversations you've had with anyone what you've seen on H.B. dot com.

And I I think Theres a college on next week burned a couple of weeks, but I'm curious what you what you can tell us thinking of let the let me start from that since we know the if he's had a topic that were the result of interest we have organized especially finish and we try and on the team where they will go in and out of the they both have on the modern the.

Progress we have made on 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 of other opportunities that the isn't these new business margin is going to create.

We as you said, we launched the their solution and a couple of weeks ago in Staples, We launched two three printers on laser printer and through and to increase and that's where we are starting to show the IDE the incremental value. The this brings to loyal customers.

So far it's early to say what the reaction is what we are encouraged by the initial response here, but we need to the wait and see how it goes but we continue to be very excited about the value of the will create the term.

Our next question comes from day, the boat with you the at.

Thanks, guys.

The little bit of of different topic can you give us an update on your structural cost reduction program. I think you mentioned on the call. The like exceeded your first of your target of roughly 40% of the gross savings what does the need for your team and your three from a timing perspective, and the magnitude perspective, and then I have a quick follow up.

Sure and now thanks, and good afternoon, and so as you know that that's actually my other role and and I would say look we're just very pleased with the progress and the program and it's very much on track and.

In terms of that's why 20, we're ahead of schedule and had actually the the 40% cost reduction plan that we'd originally highlighted so I just would like to note that you know the your opex reduction that you've seen the Shia where both the combination of structural and temporary reductions and areas like you know travel the dense et cetera.

Well, we didn't you know opportunistic because of cold and so you know we are committed to staying on track and and hitting our plans and we do expect.

We expect to achieve at least 75% of the $1.2 billion go in and ask why 21.

Great. That's helpful. And then maybe just the and just as a quick follow up in terms of your cash flow dynamics balance by sort of the macro uncertainty that you talked about in your prepared remarks and is there.

And any change and thought in terms of how you would think about the applying your balance sheet, whether it's the change and maybe you're talking of course leverage ratio or I know you raised the dividend or is there any other sort of potential.

Changes in your thought process from the capital allocation perspective. Thank you.

Thank you we continue to to remain and.

True to the principal and had we outlined in the value plan, let me remind them to everybody. So to make sure. We everybody's on the same page we increased our leverage our target leverage ratio between 1.5 and two we have committed to return 100% of our key focus on free cash now.

Over the long term and then I got on 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 and $1.3 billion per share we have announced and we continue we plan to continue to buy.

At least $1 billion of shares every quarter and do it in the following quarters. We have additionally increased the dividend by 10% on.

On the what do we have also decided the given the uncertainty and certainty that these two we still see in the world. We're gonna of remain for the balance sheet foreseeable future in the non oversight of the leverage range out because we think is the right thing to be prudent and the thing I define given that many scenes could could have on in the world in the last two.

The people in the next two or three quarters.

Our next question comes from Rod Hall with Goldman Sachs.

Yeah. Thanks for the chance of the question I wanted to come back the supply and see Enrique if you could talk a little bit you mentioned that you renewed promotions and that's on a positive pricing effect and I Wonder if you could talk about how much of a pricing effect that had on the year over year basis.

And then I have a follow up to that.

Yeah, we don't disclose the specific details I can tell you this kind of being one of the key drivers of the revenue improvement or the 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 on that from our share of perspective.

We're meeting and we put aside the geographical differences windows and meeting our fair share goals and how do we announced a few a few months ago and the combination of usage higher price in goods and results on with brokers for my share perspective on some of the onetime effects and maybe worth talking before are driving the EPS.

The format that we see and supplies.

Okay. Thank you and then my follow up the that was on the other side of that equation the unit declines and supplies I Wonder if you could talk about whether those were similar to Q3 or were they lower than Q3.

I I guess, you mean, the that they're not been of pages in commercial yes.

Well, let me let me just on quite a lot of commercial total total supply of units. However, you want to quantify that yeah. So let me let me give you some color on what we have seen during Q4, if we look out of Q4 compared to Q free and the number of pages painters. They decide on improvement between Q4 and Q3, but if you look at the well.

I wish a month by month during the month of the three months of Q4 usage has been fairly stable similar to what we saw at the end of Q3, so the improvement quarter on quarter, but not much improvement seems the and of QC. In fact, what we have seen during the last few weeks and the it anymore.

Q1 comment.

Yes.

And we there and any growing on the number of cases grow and in many countries. We have seen again as low down in the number of pages printed and commercial customers and this is something that's of course. This already is built on our guide and built into the prediction and we have made.

And our last question today comes from that Cabrall with credit Suisse.

Yeah. Thanks for squeezing me and meet you mentioned on the PC side, the you're seeing some elevated backlog exiting the quarter. Just wondering if there's any way to quantify that and and talk about how big of a drag that was on the quarter and and then thinking about the supply constraints from here and just if you could comment on where you're seeing the biggest bottleneck.

And how long you think it will take to reach supply demand balance going forward.

Let me, let me take the question and I'm, probably going to sound like a broken record because during the last few 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 a day know Q4 is the big as we have ever had.

So even though the the difference between supply and demand the being reduced its actually been and case, but it's all driven by increases on the of demand the money really driving it continues to go and we expect that the situation will continue at least through the first half.

Of two first of all of our fiscal year 2021, it's really happening and is here to stay or leave for for a couple of course and.

Got it and then sticking on Pcs and it seems like there's a lot of moving pieces are on margin heading into 2021, just wondering if you're talking about the the puts and takes in the Q1 and beyond the on the PC side and how we should think about things like the impact of Chromebooks vs desktops on on mix.

And the impact of component cost going forward.

Hi, Matt its moving maybe I'll take the questions. So let me give you some color around the P. S. At Q1 outlook. So we do expect those margins to be similar to Q4 back in the three and a half to try the half the set range, but I think a couple of points system will the the trends around work and one for the holiday and are going to continue and that will definitely continue to drive that and.

Next to net books, and and particularly into like does low and I S. P products, but we expect that to be somewhat offset by pricing discipline, a and then for the revenue per selective it'd be slightly below normal seasonality given the supply constraints that we talked about and and out of backlog will continue to remain elevated so I think finally supply chains normalized but.

There are some constraints around you know panels and see abuse and this may impact our ability to meet that demand for notebooks.

Thank you.

Well. Thank you everybody for for joining the call today before and I wish you a great and he didn't for the rest of your living in the U.S. leave me nor do we have few of your thoughts.

Well the yourself 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 I really allows us to delever and leave yourself and to navigate the pandemic and have already started way during the last quarter and we.

We have also showed that the team knows I really executing on these difficult times and they deserve a lot of credit in terms of the ability to identify opportunities people on the company and the high the maximum value that we could from those opportunities. We're very concerned about Q1, and the and the guy that we provided today.

These kind of out of 21, the already has to feel a lot of uncertainty given where we are in the pandemic, but do we know how to navigate the situation and we know that and we are confident and we will continue to create value for our shareholders. During next year. Thank you.

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