HP Inc. CEO on third quarter earnings and supply challenges

HP Inc. CEO Enrique Lores sat down with Yahoo Finance's Brian Sozzi to discuss the company's third fiscal quarter earnings report, as well as to discuss the ongoing impact of coronavirus on the business, supply chain shortages, COVID vaccine mandates, and what the future holds for the company post pandemic.

Video Transcript

BRIAN SOZZI: Enrique, good to-- good to see you, as always, here. So take us through this quarter, a pretty big earnings beat for HP, but a little light in terms of sales. Was there a part of the business that surprised you in the quarter?

ENRIQUE LORES: Sure. Let me-- let me give you my view of the quarter. I think we had a very solid quarter where we continued to transform the company and perform at the same time. We grew revenue 7%. We grew operating profit 70%, and we grew EPS by 100%. This was driven by very strong demand across the portfolio.

But we could have sold more if it wasn't because of some of the shortages that we are experiencing for component. But we really delivered strongly on the bottom line because of the demand that we see for our products and how are we managing price and mix.

BRIAN SOZZI: And it's not just-- I imagine it's not just shortages for chips. Where else are you seeing product shortages for, you know, anywhere to help you make laptops or printers? Where else are you-- you just can't get the supply you want?

ENRIQUE LORES: Well, there are two basic problems. The one that is impacting PCs is mostly component shortages. And when I talk about components, I'm not talking about CPUs or memories. I'm talking about commoditized components-- Wi-Fi controllers, Wi-Fi connectors, codecs, wealth managers. This is really where we are seeing the shortages.

The other impact that we are seeing is because of some of the factory lockdowns in southeast Asia. There are many countries-- Malaysia, Vietnam, Thailand-- where COVID is hitting very strongly, and many factories have been closed because of that. In some cases, it has impacted our factories. In many other cases, it's impacting the factories of some of our suppliers.

BRIAN SOZZI: And that's one-- I think, one story not told enough on the impact of the pandemic here, how it is impacting lots of supply chains around the country. Have you had a chance to take a step back, you and your team, and think about diversing-- diversifying your supply chain out of some-- out of some of those countries?

ENRIQUE LORES: Well, one of the big lessons of the last month is the fact that we need to improve the resiliency of our supply chain. Now, many of these changes takes time to do and times to execute. But clearly, we are evaluating alternatives that we have to move manufacturing locations around the globe to minimize the dependency that we have with some specific regions.

BRIAN SOZZI: Can you move more back to the US, production?

ENRIQUE LORES: Well, we are looking at all options. Moving it to North America, moving it to Europe, closer to where our customers are is clearly one of the options that we are contemplating. And we are looking with our suppliers, with the US government to explore potential alternatives.

BRIAN SOZZI: You know, let's-- let's touch on some of those customers. You know, we are getting ready to get into the back-to-school season. It has started for some folks. How would you characterize demand from the education sector?

ENRIQUE LORES: For the education sector in the US, we saw a slowdown of the demand in the second half of the quarter. Many school districts decided to stop some of their investments because they didn't have clarity of when or how much investment they were going to be getting from the federal government.

Now that this has been clarified, we expect demand to grow again at the end of the quarter or during the beginning of the following quarter. But what we see is very strong demand overall. As offices has been reopening, demand for commercial has grown. And during the quarter, demand for consumer also grew.

BRIAN SOZZI: On the commercial side-- so I'm just looking at the quarter-over-quarter growth rate. So printing on that basis, sales were down 8%, supplies down 7%. Is that-- does that reflect those return to office dates being pushed back?

ENRIQUE LORES: Well, what really-- what we are seeing is strength of the demand on the commercial side as officers are reopening. This is really what we see from a demand perspective. What you see in our numbers is a combination of demand, but it's mostly driven by supply. We are in an environment which is really supply limited. Demand is exceeding, by far, the amount of product that we can produce, both for PCs and for printers.

BRIAN SOZZI: Now, the-- just staying on the office dates getting pushed back, you know, how does that change your planning for the business into 2022?

ENRIQUE LORES: Well, what we are planning and what we were planning before is for an uptick in commercial that we continue to see. What is happening is that that progress is-- and even, depending on the country or depending on the region-- depending on what is the situation of the pandemic. But we overall continue to see progress and continue to see more investment on the commercial side that we think is going to continue through 2022.

BRIAN SOZZI: So despite some pressures in the business, some areas, you were able to grow your profit margins, your operating margins. How did you pull that off?

ENRIQUE LORES: Well, what we are seeing is that the difference between demand and supply is allowing us to manage mix very efficiently, manage prices very efficiently, and also to reduce significantly the investments that we need to make every quarter in marketing incentives, promotional incentives, sales incentives for our channel partners because they really don't need that amount of investment to sell the products that we have. And this is really having a very positive impact on our profitability.

BRIAN SOZZI: Switching gears a bit, we're asking all of the leaders that we talk to how they're approaching their return to work plans. Are you back in the office? Is your team back in the office? What is the status there?

ENRIQUE LORES: We have some people back to the office, but a very small percentage of the total employees. We were planning in the US to reopen our offices in September. We have decided to delay that because of the impact of the delta variant and the uncertainty of the situation.

What we have also decided is that starting November 1, to be able to be back, to come back to an office, we are going to be asking employees to show proof of vaccination. We think it's important to do that to protect employees, which continues to be one of our key priorities as we manage this environment.

BRIAN SOZZI: How difficult is it to-- I guess, to put in a vaccine mandate at a company like HP?

ENRIQUE LORES: It was a difficult decision that we evaluated carefully because we know that there are employees that really want it to happen. It really is going to be controversial for other employees. But at the end, we decided that was the right decision to make because, again, we are trying to protect the majority of our employees. And asking for proof of vaccination we think is important to minimize the risk of people getting really sick with coronavirus.

BRIAN SOZZI: And do you agree-- I guess, just given that vaccine mandate, do you agree with what Delta came out here? They're coming out very forceful. They came out very forceful this week saying they're going to jack up health insurance premiums for workers that aren't vaccinated by $200. Are you looking at something like that?

ENRIQUE LORES: Well, in our case, what we are saying is we are going to be asking employees to show proof of vaccination. For those employees that for religion reasons or for health reasons they will not be able to do that, we are going to try to accommodate their needs. And this is really the approach that we are taking at this point.

BRIAN SOZZI: All right, we'll leave it there. HP CEO Enrique Lores, always good to see you. Always answering the tough questions. We'll talk to you soon.

ENRIQUE LORES: Great to see you, Brian. Thank you.