HP Inc. Financial framework driving shareholder value Cathie Lesjak September 15, 2015
84
We are a global industry leader in our businesses Net revenue By segment and business unit Non-GAAP operating profit By segment Net revenue by region Desktops 21% Workstations and Other Personal Systems 6% Print Supplies 26% $5.1 billion Notebooks 33% Personal Systems = 60% Printing = 40% $54.6 billion Print Cons. HW 4% Print Comm. HW 10% Printing 78% of total Personal Systems 22% of total 3.4% OP margin 18.4% OP margin Americas 46% US: 36% Canada/LA: 10% EMEA 35% Non-US net revenue = 64% of total net revenue APJ 19% NOTE: BASED ON NON-GAAP SEGMENT REPORTING FOR LAST FOUR REPORTED QUARTERS FROM Q4 FISCAL 2014 TO Q3 FISCAL 2015 NOTE: NON-GAAP OPERATING PROFIT EXCLUDES AMORTIZATION OF PURCHASED INTANGIBLES, RESTRUCTURING CHARGES, ACQUISITION-RELATED CHARGES, SEPARATION COSTS, AND IMPAIRMENT OF DATA CENTER ASSETS NOTE: REVENUE MIX CALCULATED BASED ON TOTAL SEGMENT REVENUE, WHICH DOES NOT INCLUDE INTERCOMPANY ELIMINATIONS NOTE: OPERATING PROFIT MIX CALCULATED BASED ON TOTAL SEGMENT OPERATING PROFIT, WHICH DOES NOT INCLUDE INTERCOMPANY ELIMINATIONS 85
We improved operating profit % amidst market & economic headwinds +77 bps or +5% Key cost savings: Streamlining operations Process re-engineering Labor savings Optimizing variable supply chain costs Q1 13 Q3 13 Q1 15 Q3 15 Enabled increased R&D spend to support our innovation agenda 86 NOTE: BASED ON NON-GAAP SEGMENT REPORTING FOR PRINTING AND PERSONAL SYSTEMS NOTE: NON-GAAP OPERATING PROFIT EXCLUDES AMORTIZATION OF PURCHASED INTANGIBLES, RESTRUCTURING CHARGES, ACQUISITION-RELATED CHARGES, SEPARATION COSTS, AND IMPAIRMENT OF DATA CENTER ASSETS
Capital structure is supported by strong cash flows Expected day one capital structure $B Key credit highlights Total cash Total debt Total net debt ~$4.5 ~$6.8 ~$2.3 Strong liquidity profile Investment grade credit rating Accessibility to debt capital markets 87
Capital allocation framework Source and deploy the appropriate mix of capital to the most productive uses Determine business plans and return targets Fund capital uses necessary to achieve business objectives Allocate excess cash to best economic profit opportunities Develop growth and earnings targets to maximize shareholder value over the long-term Establish desired credit rating and liquidity needs to guide the capital structure targets Maintenance operating expenses and capital expenditures Regular dividend Required pension funding Balance sheet adjustments to achieve credit rating target Organic growth investments Capital distributions - Share repurchases - Incremental dividends Mergers and acquisitions Incremental pension funding Maximize economic return and shareholder value by generating the best risk-adjusted return on investment 88
FY16 capital allocation priorities Disciplined framework drives shareholder value Committed to robust dividend policy Share repurchases more than offset dilution Investment in key growth areas Return 50% to 75% of free cash flow in FY16 to shareholders through dividends and share repurchases 89
FY16 assumptions and outlook Key assumptions Revenue Y/Y decline moderates from FY15, with pockets of growth Currency impact Approx. 3 to 4 pts. Y/Y headwind to revenue Tax rate 22% - 23% Share count Approx. 1.8B with moderate decline GAAP only charges Approx. $300M OI&E Approx. $(350)M Outlook Non-GAAP EPS $1.67 - $1.77 GAAP EPS $1.55 - $1.65 NOTE: FULL YEAR FISCAL 2016 NON-GAAP NET EPS ESTIMATES EXCLUDE AFTER-TAX COSTS OF APPROXIMATELY $0.06 PER SHARE RELATED TO SEPARATION COSTS AND APPROXIMATELY $0.06 PER SHARE RELATED TO RESTRUCTURING CHARGES 90
FY15 to FY16 non-gaap EPS outlook bridge $1.76 $1.79 $(0.34) $0.03 $0.07 $1.67 - $1.77 $0.41 $0.48 $(0.08) $(0.04) $(0.07 - $0.11) FY15 non-gaap EPS Currency Dis-synergies Incremental Investments Volume/Mix Productivity gains Share buybacks / other FY16 non-gaap EPS 91 NOTE: FY15 OUTLOOK REPRESENTS THE HP INC. CONTRIBUTION OF TOTAL HP S CURRENT OUTLOOK OF $3.59 - $3.65, REFLECTS THE MOVEMENT OF MARKETING OPTIMIZATION TO HP INC. FOR THE FULL YEAR NOTE: FULL YEAR FISCAL 2016 NON-GAAP NET EPS ESTIMATES EXCLUDE AFTER-TAX COSTS OF APPROXIMATELY $0.06 PER SHARE RELATED TO SEPARATION COSTS AND APPROXIMATELY $0.06 PER SHARE RELATED TO RESTRUCTURING CHARGES
FY16 outlook and assumptions Cash flow FY15 FY16 Cash conversion cycle -14 to -15 days Relatively flat Y/Y Operating cash flow $2.7 - $2.9B $3.0 - $3.3B Net capital expenditures $0.4B $0.5B Free cash flow 1 $2.3 - $2.5B $2.5 - $2.8B Select operating cash flow details FY15 FY16 Separation cash payments $0.9B $0.2B Restructuring cash payments $0.1B $0.2B Normalized free cash flow 2 ~$3.3 - $3.5B ~$2.9 - $3.2B 1. FREE CASH FLOW = CASH FLOW FROM OPERATIONS LESS NET CAPITAL EXPENDITURES; NET CAPITAL EXPENDITURES = INVESTMENTS IN PROPERTY, PLANT AND EQUIPMENT LESS PROCEEDS FROM THE SALE OF PROPERTY, PLANT AND EQUIPMENT 2. NORMALIZED FREE CASH FLOW = FREE CASH FLOW LESS SEPARATION CASH PAYMENTS AND RESTRUCTURING CASH PAYMENTS NOTE: FY15 OUTLOOK REPRESENTS THE HP INC. CONTRIBUTION OF TOTAL HP S CURRENT OUTLOOK OF $3.5 - $4.0B, REFLECTS THE MOVEMENT OF MARKETING OPTIMIZATION TO HP INC. FOR THE FULL YEAR NOTE: FULL YEAR FISCAL 2016 NON-GAAP NET EPS ESTIMATES EXCLUDE AFTER-TAX COSTS OF APPROXIMATELY $0.06 PER SHARE RELATED TO SEPARATION COSTS AND APPROXIMATELY $0.06 PER SHARE RELATED TO RESTRUCTURING CHARGES 92
Driving long-term sustainability Targeted investments required to support favorable long-term cash flow trajectory Assumptions for illustrative cash flow graph Optimize short-term Reduce operating expenses and contra Hardware units decline yielding share loss Supplies decline accelerates 1 Maximize long-term Invest in placement of high-value hardware units and innovative consumption models Leverage technologies to play in adjacent markets and expand TAM over time Stabilize supplies and expand annual cash flow 2 1 2 Maximize area under the curve 93
Looking to the future: long-term financial model Revenue growth Outperforming target markets % Operating margin rate 8% - 10% Cash flow Trajectory tracks earnings Capital allocation Framework: Return 50% -75% Dividends: Growth in-line with earnings 94
Reliable returns, cash flow and opportunities for long-term growth 1 Our recurring revenue streams and efficient operating models drive strong margins and cash flows 2 Our leadership positions in large markets offer pockets of growth opportunities 3 Investments optimize cash flows and shareholder returns over time 4 We have the experience and increased focus to deliver on our commitments 95
Thank You 96