HP Inc. (NYSE:HPQ ) Bernstein 38th Annual Strategic Decisions Conference June 2, 2022 8:00 AM ET

Enrique Lores - Chief Executive Officer

Good morning, everyone. I'm Toni Sacconaghi, Bernstein's IT, Hardware and Electric Vehicles Analyst. I'm super pleased to have Enrique Lores here from Hewlett-Packard. He became CEO in November 2019 and has been a regular participant of the Bernstein SDC. So we're super pleased to have him, particularly in the back of earnings, which were earlier this week. Enrique and the team actually did earnings, jumped on a plane and arrived here at 3:00 AM in the morning. So we're very grateful for their efforts.

Before we start, I just wanted to read HP's disclosure statement. Today's discussion involves 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 Investor Relations webpage at investor. hp.com. I may have a future in IR.

At some point. Okay. Well, let's just jump into it. I want this discussion to largely be strategic in nature, but you just did report, I think, results were pretty strong. You ended up guiding up EPS to the high end of the range. Maybe you just want to punctuate a couple of highlights from the quarter and then I have a couple of specifics.

Sure. I think the results here is that, despite the current environment which has been fairly complicated, given all the different challenges that are happening at the same time, we were able to deliver the results that we were expecting. In fact, we were on the high side of the guide that we provided in terms of EPS. Also, another big highlight is, we made very good progress in what we have defined as the growth strategies of the company, as the growth businesses of the company.

In October, we said that there was a portfolio of five businesses that we expect to be above $10 billion at the end of the year. In the first half, this portfolio was already $5.6 billion, which talks both about the progress that we have made and about the potential of this business -- of these businesses. So this was also a key highlight.

And the second and the third is, we continued with our strategy of returning capital to shareholders, we will return close to $1.3 billion in a combination of dividend and share buybacks, which is also key part of our way to deliver and to return value to shareholders. These are kind of the three key highlights of the quarter.

Great. Maybe you can talk a little bit, because you did on the call, just about Europe and the consumer. It did sound like at the margin you are potentially seeing some incremental weakness or hesitancy. So maybe you can discuss what you're seeing on both of those fronts?

Sure. I think what we have started to see in Europe and it's hard to know where this is going to go, is some weakness on the consumer side. I think both the proximity to the war and also the concerns about the potential energy crisis and the news this last two days have kind of reinforced that, have made the consumer being more concerned about investment and we have seen some weakness. Again, it's hard to know where this is going to go, but we have started to see some of these signals.

And just to be clear, are you seeing any evidence of longer buying cycles or hesitancy from enterprises or SMB in Europe?

Not at this point. No. But again, given the situation, it is one of the areas that we're working closely, because, I mean, things could go in a positive or negative way, and we need to make sure that we understand and we monitor the trends. For example, last week I was in Europe, I was participating in the Davos Conference, and there is a very clear difference between the optimism between European CEOs and American CEOs. You could clearly see the difference in terms of optimism and how the things -- how they think the world is going to be evolving. But again, we haven't seen this translated into actual business.

And on the consumer side more broadly outside of Europe, have you seen any indication of incremental hesitancy outside of Europe?

The only other area where we have seen some impact during the last weeks has been China, and has been clearly driven by the lockdowns in many big cities. Because we need to realize that when we talk about lockdowns in China, especially during these last months have been real lockdowns, not even consumers or customers couldn't even buy online. So therefore this had a significant impact on sales. There we saw an impact. On the other side, in many other parts of the world, we have seen strong demand choice, that's how we see it.

Okay. One other area that I wanted to clarify was, you like many people have struggled with getting components throughout the year that's resulted in a really significant backlog. And you were starting to drive down that backlog now. I just -- I wanted to understand how that is progressing? I think at the end of the fiscal year, you basically say, we have nearly a quarter's worth of backlog in PCs. And it appears as though you feel you will drive down most of that backlog towards normal levels by the end of the year or early next year.

So is A, that's the correct way to think about it? And that points to a pretty substantial drawdown over the course of 2022. And I think you said it's unclear you're going to drive down backlog because of an IC constraint in Q3. So over Q1, Q2 and Q4, we're seeing backlog potentially come down nine or 10 weeks, is that sort of the right way to think about it?

Well, of course, we have an objective to reduce backlog because what backlog means is, we have a customer that wants to see a product in their office and we are not able to deliver it. So there really we have an objective to reduce backlog. What we have said is, our goal will be to reduce that by the end of the year or early next year. And this is what we are targeting to do. In Q3, specifically, we are going to have a problem, we already know about a specific component that is going to be impacting shipments of PCs. And therefore Q3, we will do everything we can to improve the situation. But based on what we see today, we will not have a big impact on backlog. But after that, we will try to reduce that.

Right. So is it just a punctuated -- I think a lot of people try and understand order dynamics. And so, if backlog is going from almost a quarter to almost normal levels, that would suggest that backlog is coming -- in Q1, Q2, Q4 might be coming down three weeks during the quarters. Are you making that kind of progress in terms your backlog drive?

We are not quantifying how fast we are loading that, but I mean, it's a mathematical exercise. We are seeing -- we are reducing backlog means orders are below what we’re shipping. So yes.

Right. Okay. And on the component issue, can you elaborate whether that's a single source issue or anything further about that? Just in part, I think people are curious from a supply chain perspective and whether other people can impact it, but also to the degree that it might take longer or shorter than you expected. Is there anything more you can discuss about the nature of that component shortage for Q3?

So if that component is not a single source component, but it's a component that we use extensively in our commercial notebook lineup is a yield problem with one of our suppliers that notified us a few weeks ago that their yield in one of their big factories is below what they were expecting and therefore it's going to have an impact -- a significant impact on the short-term. We have spent a lot of time with them going through their plans, understanding what the recovery plan is, seen also improvements in the last few weeks. So this is why we are confident that this is a one quarter gap. And again, if we can do better, we will, both by increasing capacity and by shifting towards other components that we can. And therefore, we expect to recover in Q4.

Okay, great. I just want to remind folks that we are going to use cards here for questions if anyone has questions. We've tried somewhat unsuccessfully to get people to adopt the pigeonhole technology, which is typing in a question. I'm seeing a lot of incredulous faces when I mentioned pigeonhole. It hasn't really worked so far. So there are the old fashioned cards in the spirit of paper and print for HP in part. So if you have a question, please write it down and Themis and my team will collect them if you could just pass them to the center of the aisle.

And I have to say, I really think Toni when he told me because it shows the power of print. So thank you, Toni.

You're welcome. So a question that I get a lot, I'm sure you get a lot is, what did COVID do in terms of distorting demand for HP products in the sense that, clearly, there were a few quarters where you had -- everything was shut down and revenue was negatively impacted. But clearly, ‘21 was a spectacular year, right? If I put -- if I kind of put it in context, I think the prior six years HP was $6.8 billion to $4.3 billion in operating profit, but ’21 was $5.8 billion. And printing margins and PC margins were each the highest in 12 years. So what do you think happened in ‘21? And the -- I guess, the worry is, did you go through sort of this non-sustainable period or pull forward demand from future periods? And how do you think about that?

Sure. Let me -- I will answer it differently for the two businesses, because I think the impact was different. Starting for PCs, we saw a lot of demand for PCs as people went home to work, kids went home to study and this had a very positive impact on demand. And what we saw is an increase in the penetration of PCs.

So we went from basically a PC per home to multiple PCs per home and as the need for having a PC was very clear. And what this also showed is that, if you want to do some real work, if you want to do some -- if kids needs to study, the form factor of a PC, the keyboard plus the screen showed to really drive much better productivity than a tablet or a small screen in a phone. And therefore, we think that the demand even if in the short-term may decline, it is going to be sustainable over time.

And we also saw companies investing significantly in equipping their teams to be able to work from home with PCs and other equipment. So we saw an increase of the demand of PCs. We think that this demand or these volumes are going to be sustainable. We don't think we are going to continue to see this amount of growth. We expect slight decline in units this year, not in revenue. And after that, the core PC market will stabilize at these numbers. This is our projection and the projection of most of the industry analysts.

On the PC side -- on the print side, we saw very different things. We saw a very fast reduction of printing in the office with people not being in the office. We saw a decline of pages, we saw a decline of equipment being bought. And we saw a significant increase in the home side, because many people as they were working from home, they were printing more from home, they were buying more printers from home, and we also see an extension of the life of the printers, because people were started to reuse printers that for some time had not been used and this really helped us as we went through ‘21. And in the last part of printing on the industrial side, at the beginning of COVID, we saw a fairly negative impact. We saw most of the companies stopping their investment in Industrial Equipment. But in the last part of the year, we started to see a recovery that is -- has continued in 2022.

And the strength in margins that you saw on both sides of your business, what do you attribute that principally to?

I think this is a great point. We also see a very favorable pricing environment given by shortages, given that demand was significantly above capacity. This allowed us to sell without having to do promotions. And therefore, this had also a positive impact on margins.

And this is why when we look at the projections going forward, our projections are that as pricing will normalize, businesses will go back to the ranges that we shared in our Analyst Day, 5% to 7% for PC, 16% to 18% for print, which is, for example, in the case of print, almost two points below where we are today.

Okay. Yeah. I'll come back and revisit those. So maybe we can talk a little bit about each of the businesses. So on the -- on print, on -- excuse me, on PCs, I think PCs were 260 million units in 2018, they were 342 million last year or something. And I think you said in the earnings call you expect like units to maybe be down low single-digit 330 million for this year. And then maybe kind of stabilize from there.

So let me be provocative in terms of view. So last year, units shipped were 342 million, but HP built a quarter's worth of backlog. That's like almost 20 million units, so there were 20 million units extra demand Lenovo built another quarter of demand. They entered the year -- exited the year with close to a quarter in backlog, that's another like 15 million units. Dell built backlog, that's another 5 million or 10 million units.

So demand last year -- unit shipped were 340 million, demand was like 380 million. So we went from 260 million to 380 million. And this year to the degree that people are drawing down backlog if units are 330 million, isn't demand more like 290 million? And therefore, from a demand perspective, aren't we seeing a really dramatic slowdown? And why isn't the new level 290 million?

I think -- and this is a big part of our strategy. We -- I think units are important, but what we have learned and proven during the last few quarters is that, mix is even more important. And you are absolutely right that our projection is that units will be declining this year, but revenues will be growing because of mix and because of pricing. And as we look at the projections that we shared with the market in October, our projections for the core PC space is that from a revenue perspective in the coming years is going to be flat and we expect this year to see growth in the 4% range or somewhere in that space. And this is really what is driving our plan and driving our strategies.

There could be volume decline, especially in the low end. Chromebooks have clearly declined low end consumer, as we were saying before, has also declined, but premium categories in commercial, premium categories in consumers, especially gaming continue to grow. And when we talk about backlog, the backlog that we have is really concentrated in these small premium categories.

Right. And so if you were to just -- so if the market is going to be down, call it, I just use units and I agree with you and that there's a whole pricing dynamic. But units are just tangible and a unit is a unit. Right? So when you think minus 3, like consumer down double digits, Chromebook down 20% plus and commercial growing from a unit perspective this year. Is that sort of directionally how you're thinking about it? And then on a more normalized basis once we sort of absorb the super tough comps from Chromebooks, etcetera, how do you think of relative growth rates? Again, to mix and pricing is a little difficult, but how do you think about relative growth rates? So are those the right growth rates roughly for this year? And how do you think about kind of normalized growth rates for those categories?

I think that as we enter into next year and beyond, our expectation again in terms of revenue projections for the market that it will be flat. And then if mix continues to evolve, then unit wise we'll continue to decline, but revenue will be staying flat. Because you're right that a unit is a unit, but a dollar is also a dollar.

No, that's more important for you. I'd rather you have the dollar then the unit. Right. And on the ASP dynamic, you mentioned two components. You said, there's a pricing dynamic and there's a mix dynamic. In both -- well, let's just stick with PCs and we'll go to printing in in a bit. But from a PC perspective, how much of the ASP increase, which I think has been kind of 20% plus in some quarters, how much is attributable to price action versus mix action? And so, let's start with that.

Yes, our estimate and we shared that during the call is 40% is driven by price, 60% is driven by margin -- by mix. Rough numbers.

Right. But the part of the mix I would imagine that the dominant vector on mix is via huge Chromebook sales and Chromebooks for the market were down like 70% this quarter. So Chromebooks crossed a lot less. But within specific categories, so within commercial, within consumer, within Chromebook, was -- how significant was the price impact, because that mix shift away from Chromebook was very, very dramatic for the market and I think for HP this year. So that obviously had a huge impact on mix, right? So it's not when you say mix, a lot of people think, oh, well, you're just selling a lot more premium commercial units, really you're selling more commercial units and lot less Chromebook and that's driving the ASP increase. I'm trying to get a sense of whether you can isolate within product categories, whether you're actually seeing ASP improvement or is it just the Chromebook dynamic mix?

If we remove the impact of Chromebooks, for example, on the commercial side, commercial -- the commercial units grew by 18%. So this tells you it is not only the negative impact of Chromebook, easily positive growth in the commercial categories, and this is driving significant growth. We also shared that gaming which is kind of a proxy for premium in the consumer space grew this quarter 40%. So all this is really driving the improvement in mix that we continue to see. And these are categories where because of use models and what we expect to see happening in the coming quarters, we think there is sustainable demand. Gaming as a category is going to continue to grow. We see companies continue to invest in providing better experience to their employees. We are -- we were talking about this before, we believe that the way of working is going to be hybrid. And for people to be able to work from home, they need better configurations in their PCs. They need better memories, they need better displays, they need better cameras, they need better speakers. And this drives the mix towards more premium products, more premium categories.

Right. Okay. I'll move on from the pricing. I just want to clarify that the gaming at 40%, that did include some inorganic contribution. Is that -- was that the whole category? Or was that --

No. This 40% is for gaming PC.

All HP Omen and HP Victus.

Okay. Just in terms of industry structure and PCs, we -- I think we saw for like eight or 10 years, the top five vendors gain share from the rest of the market has actually stopped in the last two years. And HP has been more challenged in share, I think per IDC or Gartner, you'd gain share for like 20 straight quarters, but seven of the nine last quarters you haven't gained. So what dynamic is occurring that A, is impacting HP share and are we potentially seeing a saturation in consolidation?

I think, let me start from -- the first from HP, we are much more focused on dollars that we had ever been before. And this is a big part of our value creation strategy. And we have said many times that really our objective is not to grow share, our objective is to grow value and this is reflected in how we manage the business. I think in terms of the consolidation dynamics you were mentioning, I think the component shortages has had a big impact. Many of the smaller companies are companies in Taiwan that have different supply chain models and what we have or Dell has or Lenovo has. And as we have gone through all the shortage situation there is, in some cases, being local, being present having, in many cases, personal connections has helped. As the situation will normalize, my expectation is that we will go back to a similar dynamic and this is what I think will be happening sometime probably at the end of ’23 or mid ’23 when the situation will start being more normal.

Right. Okay. And so I had a follow-up question off the tip of my -- which was alluding me now. So you talked about the unique advantage that local players might have. You maybe have struggled more with supply issues than others. You talked about this when it first started happening in ERP system, not the same kind of flexibility in terms of design modularity across products. Do you feel you've made progress? Because it still feels like you're struggling on component availability. You still have a higher backlog for instance than Dell. Do you feel you've made progress along that front? And what lessons learned if anything are there from that situation?

Yes. So yes, we have made good progress. About a year ago, we explained kind of the three big areas that we were working and across all of them we have been working. I think at a very high level, what we have learned is, our company was optimized for a certain environment. And for example, we had a very optimized system between getting an order in a country and the factories are working on that order. And the whole system was designed to minimize touch points in the order to be super agile. In an environment where we -- the amount of orders was much higher than capacity, we needed to do the opposite. We needed to have an automated process to prioritize those orders. Totally, the opposite to what the company had been designed for. And during these last quarters, we have built the tools to do this in an automated way.

When we started to do that, we were also in the middle of a huge change in the ERP system that we had started several years before. And when we started, we were not expecting to have to finish it through the pandemic, but it happened and we were able to complete the deployment of the ERP system and at the same time build these tools to optimize. So this was a big change. Second big change is, we -- our manufacturing model relies on ODMs. We don't manufacture the products, and for many components -- and in that model, we were managing only, what we call, strategic components. So we managed displays, we manage memories, we manage processes, the rest of the components were managed through the audience. It's again how the company was designed, super agile system, much lower cost. In an environment where components that we had never had a connection with were missing we had to build all those connections with the suppliers and we had to build the tools to be able to have visibility of these components and to manage them. Again, we didn't have them, we started to build them when they -- when this situation started and we have made good progress. So we really -- we needed to -- we had to adapt the company to a very different environment, to the environment where the company had been optimized for.

Okay, great. Thanks. We talked a little bit about this before about how pricing has in part contributed to strong margins. And you noted that maybe in a more supply demand balanced environment, print margins would go back to historical levels. But in PCs, you're expecting margins to be more elevated than they were historically. I think, you were 3.5% to 5.5%, now you're saying 5% to 7%. What gives you the confidence that that continues in PCs, as opposed to, let's say, printing? And how -- in a demand environment that is more muted and an environment where supply equal or in some cases, exceeds demand, why is there not a risk that we won't return to traditional margins in PCs?

Yes. So there are three factors. One is, the focus that we have on premium categories that will help. But also when we look at the personal assistant business, which is really -- the business that we have shared margins will be in the 5% to 7%. We have a -- the strategy that we have put in place is about expanding into two adjacencies that have significant better margins than what we have on the core PC space. And both, what we call, peripherals and services, which is really two areas where we are growing and growing aggressively. They have better margins and they will compensate for potential declines on the average selling price of PCs. And this is why in October we raised the guide from 5% to 7%, because we see that these two additional businesses are going to compensate for a potential erosion of the prices on PCS. And this is why we highlighted and that we are making good progress on both strategies because they really will be important for us to stay in these margin ranges.

And do you see each being -- your guidance is 150 basis points higher than it was before, are each of those sort of similar contributors? Or is mix or adjacencies more important going forward?

You mean peripherals and services?

Versus premium -- you said there's two things sort of in premium and peripherals and services, margins are up 150 basis points. So they each contributing sort of a similar amount? Or is one more pronounced?

I’d say -- I haven’t done the calculations, so I'm going to be talking from -- I think services and peripherals will have a stronger contribution, but premium is also going to help.

Okay. Well, speaking of that, you announced the Poly deal. I know it's not closed. But it -- the operating margins are depressed for them, they've struggled with the same supply issues that many others have. I think your op margins are 11%, you're guiding to 600 basis points improvement over time. But historically, they've actually been like 20% margins in some cases. Is that conservatism? Do you expect to invest in the business? Do you see taking into new markets? How do we think about the margin potential and why it may not -- why you haven't guided to margins that were sort of at historical peak levels?

Yes, I think we are always prudent in how we share the expectations and when we share our plans. But we clearly see the potential to improve their margins. When we think about the Poly business, we are going to be focused on two specific -- very specific opportunities. One is, in video conferencing rooms, and the other one is in what we call personal professional studios. You are at home and you want to be seen, you want to be heard as if you were in a -- almost in a studio when you are doing a Zoom or when you are doing a call. And if I talk for a second on the video conferencing rooms, it is a very big value creation opportunity for us. Our estimate is that in the world there are around 90 million meeting rooms. And then from there you can do some monkey math of what opportunity this could be. But if you think that half of them will be enabled with a video conferencing system, that this video conferencing systems may be upgraded every three, five years and that the cost of each of them might be $3,000. You do the multiplication and you get to several billion dollars of opportunity. And there is -- the experience today is fairly painful, especially if you have people in the room and people connecting from home, the people that are not in the room don't feel connected, don't feel present, they don't see the body language of what is happening in the room. There is a big opportunity for innovation, a big opportunity from a business perspective and this is why we are so excited about the opportunity that we see in that space.

And is the Poly distribution going to be through similar channels or through different existing and separate channels from HP. Because that that may be more of a solution sale in some cases. I'm not sure if those are specialized resellers? How do you envision the go to market here?

It's both. One of the -- Poly is helping, will be helping us both from a portfolio and technology perspective. They have already a portfolio of video conferencing solutions and headsets and cameras and speakers. So they complement from a portfolio. They also have great audio and video technology that is necessary to build this solution. And they have a fairly good go to market model of -- it's called the audio video channel that are specialist in building these type of rooms. And going forward, we expect to leverage that channel, but also to enable many of our commercial resellers that are also ready and capable of selling solutions, and many of them are going to be building a video conferencing specialist team that will be going after this opportunity. Since we announced the deal, we have started to talk and I would say the reception and the reaction to opportunity has been extremely positive.

So Logitech was at our conference yesterday and I interviewed Logitech. And I had a fireside chat with their CEO and they view video conferencing as a huge opportunity as well. Their price points are typically lower than yours. Is there a risk that you could have incremental price competition and margin pressure in that business on a go forward basis? They talk more like a $1,000 a room for a video conference solution. Typically, Poly is at a higher level than that. How do you think about that going forward?

I think there is going to be, of course, competition. But again, if you start from 90 million and you do some calculation, even assuming we get 20%, 30% share, you will see a big opportunity.

Okay. So maybe we can just move over to printing. If there are any questions, just raise your hand and Themis will collect your card and bring it up here. So, on printing, how does the pandemic change printing, if at all?

So similar to what we were explaining before, I would say there are three impacts. On the industrial side, we have seen an acceleration of some of the adoption of the technologies, because many companies are looking for more distributed manufacturing environments and this is helping especially on labels, packaging, we are seeing significant growth. On the two big categories, the impact has been the opposite. On the office side, we saw a reduction of printing as I was mentioning before. And our projection is that, compared to the projections that we had before the pandemic started, the business will be around 80% of what the projections were. So significantly impacted by the pandemic. Again, we believe that the way of work in the future is going to be hybrid. There will be less people in the office. And this -- yes, this is going to have an impact on how many pages will be printed.

On the home side, the effect has been the opposite. We saw much more home printing than we were expecting. Some of this is being corrected, especially because of kids not doing so much homework at home as they were a year ago. And our expectation is that, it will be slightly better than the projection that we have. So the pandemic will have a positive impact, but is being corrected from what it was a year ago, which we were in a, I’d say, in a very positive situation.

And on the office assumption, why is the 80% not lower for instance? I think many companies including HP are like, two or three day work weeks. And Tesla notwithstanding, yesterday as we were joking, mandating five days in the office. It feels like at the upper edge for white collar workers, it's four days a week and maybe the mean level is closer to three. And so, if it's three, A, do you disagree with that? And then how do we get to 80% if it's really only three?

Sure. I think it is -- first of all, this is our projection today. So --

Could be -- could change as if there is something we have learned in the last two years is that, it's hard to make this type of projection. But if we think of where we are today with a lot of people still not in the office, with many offices being closed, we still in many countries seen the impact of Omnicare and another variance. We have continued to see growth and we are starting to get close to that number. Could we do lower? Maybe. But at this point, this continues to be our best projection.

Also to your point about number of days in the office, printing is very different segment by segment. So many of the segments where printing -- more printing happens are segments where more people are in the office. So this could have also an impact on getting to the 80%.

And Enrique, how do you think about ESG efforts within companies impacting printing? You get a lot of emails where people say, save the planet, save paper, don't print. There are companies that have employee groups that are pushing for less printing, etcetera. What impact if any does that have on printing, particularly in the office where sometimes their companies may be consciously trying to adhere to more ESG mandates. Have you seen that at all? And why is that not a multiyear headwind to print in the office?

I think, first of all, this is not new. I think this has been going on for a long time. And when we look at printing, the printing behavior is very difference between a -- I'm talking of the office, mostly office now, is before the pandemic, our expectation was that the office printing was going to be fairly stable, decline on developed countries, growth driven by emerging countries. And this is what was driving that dynamic. We need to see now post pandemic what is the evolution, but this was already built into the plan.

Now talking specifically about HP, we -- where we have a strong commitment towards ESG and for us it is really relevant. Something that we decided a couple of years ago to do is, printing in HP is forest positive. And what we do is, we calculate the amount of paper that is being used in our printers. We calculate how much of this paper is coming from forest that are not sustainable, meaning, paper coming from trees that have been planted to become paper. And then we participate in many reforestation programs to compensate for that and it is one of our key sustainable initiatives, again, to make printing with HP forest positive.

When you took over as CEO, just about that time HP sort of lowered its outlook for printing and supplies and it highlighted challenges from [reman] (ph) and clones in the marketplace. Maybe you can give us an update on what you've done to combat that in terms of HP Plus and large tank printers. You talked a little bit about some of the statistics in your earnings call. Do you feel like -- do you feel more comfortable about those trends going forward? And have you seen any change either because of legal or distribution reasons that reman and clones are any less threatening than they were two or three years ago.

So when two years ago we announced several initiatives to address these. First, from a pure market share perspective, we shared that up to that point, we had been holding or growing our share in ink and losing share in toner, which is where one of the areas that we were more concerned and that we were going to be using all our learnings that we have had in ink to protect our share in toner. Since then, we have grown our ink share. And about 18 months ago we reversed the situation in toner and we have been growing our share in toner. And this is really by -- from using more technology in the printers to detect when our IP is violated and then stopping the printers, building more security in the cartridges, a lot of mostly technology efforts to prevent from technologies or from cartridges that are violating our IP to be used in our printers. And this has clearly had an impact.

We also shared that going forward that at that point, we were losing money with 25% of our customers, because they were either not using HP supplies or they were not printing enough for us to really get the return of them having bought a printer, because when -- in most cases, at that point when customers were buying a printer, we were losing money, it was an investment for us that we were recovering with supplies. And if they were not printing enough, either on HP supplies or overall, we would never recovering that investment. So we also announced that we were going to be rebalancing the model and making more money on printers and less money on supplies. And this is when we launched the HP Plus initiative, where basically we launched for every model of printer we have two options for customers, either they buy the option where the printer will only work with HP supplies. And then depending on the country, they get a better price or they get more value when they do it, or if they don't come in to HP supplies they have to pay slightly more for the printer. And that model has been growing extremely well. At the beginning there was some -- especially from the investment side some concern of how this was going to work. We shared this quarter that this combined with the printers where we include ink or toner at the beginning, today it’s 48% of our mix. So that mix has been growing, which means either we are already making money with the printers when we sell them, so the pro customers are profitable or these customers will only use HP supplies, which means we will recover the investment through supplies. So that has really worked.

And the other big thing that we -- the third thing we announced is that in, both segment, but especially in home, we were going to accelerate our subscription program. We had launched a subscription program for supplies in consumer four, five years ago, maybe six years ago. And during the last two years we have really accelerated adoption. COVID also helped and it was one of the positive things that we go through COVID. And today, we have more than 11 million subscribers, managing buying ink directly from us, buying toners directly from us through our subscription program. This program is good for customers because the value proposition is very strong. Printers are always working, cost of printing is lower, it’s a more sustainable model because we recycle every cartridge and it's a better model for us because it's more accretive. We make money -- more money per customers when they are in the subscription program. And we make sure that these consumers are only using HP's supplies. So it’s a win-win for customers and for us and has really worked extremely well.

And now as we shared in October, we have a subscription program at scale that we are using to sell additional services, which means we are going to be able to capture more value per customer, offering them additional value. We said in October, we were going to be launching a paper program, we have launched it, we have launched the pilot during the last quarters. We are going to be launching it at scale and which is another big inconvenience for customers to print because they need to have paper at home. We are going to be sending this paper, there is a good margin for us to do that because there is a lot of value for customers. And again, it will help us to improve or to increase the value that we will make impaired customer.

And are you confident that the profitability you're seeing on printing and on units is sustainable in light of the really strong pricing and lack of discounting you've had. So when we look at the printing margins, I presume that the improvement has all been hardware. That supplies margins are no different or lower maybe with subscription than they were before. And so, in going from 16 to 18 to kind of the 19, you've had recently. I presume that's all better hardware margins. And I think your hardware ASPs have been up [28%] (ph) or 45% for the last four quarters year over year. So how can we get confident that that margin improvement, which maybe I'm wrong, is all attributable to hardware, is ultimately sustainable in an environment where you're back to normal pricing and discounting, etcetera.

So something we shared I think in our Analyst Day and I think the percentages are still through. When we look at pricing of hardware, it had increased by around 27 points year-over-year. When we look at the average selling price increase of the industry was in the 20%. So those 7 points of incremental we think are driven by the change of mix and the improvements that we had done. And I'm talking last October. And we think this is the part of sustainable.

Okay. We have just a few minutes left, so we'll do sort of the Kramer Lightning Round here where I train, squeeze in as many questions as possible before we go. So in terms of ongoing capital return, your net debt is now $4.7 billion, you're doing the Poly deal, it's $3.3 billion. So your balance sheet isn't quite as -- isn't quite at the position it was two years ago when you were net cash positive. How do we think about ongoing buybacks, is $1.25 still realistic on a go forward basis? And how much room do you have until you get to your debt target if you wanted to do another deal?

So in terms of -- I start from the second part, in terms of our leverage target, we have said it is between 1.5 and 2. With the Poly deal, once we completed, we're going to be in the low side of that range, in the 1.3 to 1.7, which means we are within the range already. And what we have said and we haven't changed is that, in terms of return of capital to shareholders, we are going to continue to return 100% of free cash flow unless opportunities with a better return show up. So no change from what we've have been --

Does that tie your hands for additional acquisitions. So if you're at your target debt level, and you're going to returning all your cash and not paying down incremental debt, does that lower your degrees of freedom to do additional M&A?

What it means is, if we want to do another M&A, the return on investment of that needs to be better than the return that we will get by buying back shares. And this is kind of the threshold that -- the minimum threshold that we -- that we will be looking at. And again, this is not new. I have been saying this for a long time then.

So is the 100% of capital return unless a better alternative through M&As.

Right. Just to be clear. And if we think about your free cash flow over time relative to net income, historically you've actually been above your net income in terms of your free cash flow relative to your net income. Is that how investors should think about it or are free cash flow net income relatively similar over time?

I think over time free cash flow and net earnings should be consistent. Our business model is not going to change and one should be tracking the other.

Okay. Anything you want to add Enrique about either a summary or about why you think HP is a great stock. I'll see the floor for the last 30 seconds. Yeah. I think that as I have been saying for the last two years, we continue to believe that HP shares are undervalued. If we look at the projections that we have for operating profit growth or free cash flow as we were just discussing. The only way -- if we look at projection for free cash flow and we try to reconcile with the value of average shares means that free cash flow is going to be declining at perpetuity, the only way to justify the current value of the shares. If I look backwards the last five years, six years, free cash flow has been growing 8%. So this shows the disconnect between the value of the shares, what we have done and what the market believes even five years ago, we were going to do. And this is why we have put in place this growth plan. We have these five growth initiatives that are going to be sustaining the growth of the company that where we are making good progress that are going to be fairly relevant at the end of this year and this us confidence in the ability to continue to grow value going forward.

Great. Thank you for your time Enrique and your participation.