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Global supply chain is ‘still not stable,’ HPE CFO says

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HPE CFO Tarek Robbiati joins Yahoo Finance Live to discuss company earnings, supply chain disruptions, and the outlook for growth.

Video Transcript

BRIAN SOZZI: Shares of Hewlett-Packard Enterprises are under pressure after the company missed analyst estimates for sales and profits. The company also cut its full year profit forecast, citing its exit from Russia and supply chain constraints as headwinds. Joining us for more is HPE's CFO, Tarek Robbiati. Tarek, good to see you here this morning. So you had your fourth straight quarter of 20% plus order growth. That is good, but I think one of the biggest questions on the Street here this morning is, why isn't some of that growth reaching the bottom line?

TAREK ROBBIATI: Good morning, and thanks for having me on your channel today. It's a great question and it's a great way to start our conversation. Yes, we've had four consecutive quarters of order growth of 20%. And it's remarkable, and it's across our entire portfolio of products and services. The delta that exists between older growth and revenue growth is driven by the supply shortages and also disruptions in the supply environment. So we have been witnessing this for some time.

The supply chain globally across our industry is still not stable. It will take us a little bit of time to get to that point. And the reason why I say this is that we have to understand the root causes that got us to where we are in the industry. And we have to look back at how much dependence there was on a supply chain that was based in Asia and in China in particular and the fact that the supply chain is decoupling from Asia and from China. That obviously takes time.

We have been coming from decades where 40% of the global manufacturing capacity was in China. And that will have to find a new equilibrium and be a lot more distributed across various countries in the globe in Europe and also in Asia. By the way, we've opened up a new factory in the Czech Republic to make sure that our supply chain is geared for the future and built to be not only efficient cost wise, but also efficient in terms of speed, in terms of redundancy and resiliency for the future.

So we're moving forward on that front. But obviously, you cannot expect decades to be reversed in a quarter or two. It will take us, I would say, a few quarters to navigate this. And we're in the process of doing so. And so is the entire industry.

BRAD SMITH: What is that timeline that we should anticipate that we should kind of benchmark against for the supply chain to stabilize as correlated with the forecasts that you have?

TAREK ROBBIATI: So we don't expect the supply chain stability to be attained before a few quarters from now. It will be well into next calendar year 2023. Part of the reason why that is, and we witnessed this with the Shanghai lockdowns, is that the pandemic is not over. And China is continuing to enforce its zero COVID policy. And obviously, this, from time to time, creates some disruptions, like the one we've seen in Shanghai. So my best estimate for you is to say, at this stage, we're seeing this stabilization happening towards the end of calendar year '23.

BRIAN SOZZI: Tarek, within your revised guidance, how much of an economic slowdown have you baked in?

TAREK ROBBIATI: Yes, so our revised guidance was change on EPS, but I have to say, we maintain our free cash flow guidance of $1.8 to $2 billion. And that's very, very important, particularly now with the downturn of the equity markets. Companies are no longer simply valued on revenue multiples, but we have to look at profitability and free cash flow generation. And we are doing extremely well on that side. We're comfortable at this stage reiterating our guidance on free cash flow of $1.8 to $2 billion.

In that guidance, we obviously had to factor in some changes at the macroeconomic level, as you point out. And one of the headwinds that we're facing is foreign exchange rates. The US dollar is appreciating materially against other currencies, if you look, in particular, the euro, the British pound, and the yen. And when we started our fiscal year, we had anticipated some movement in favor of the US dollar. We anticipated that this would affect our growth by 50 basis points downwards. But the reality now is that this is going to affect our growth by two points downwards.

And so that is one of the headwinds that we're facing because effectively, Europe is suffering, given all the events that are happening there. And it's normal that you therefore see an impact on us. 40% of our revenue comes from the Americas. 27% comes from Asia-Pacific. And the remainder comes from Europe, which is a large number, 39%, if you consider it from our vantage point.

BRAD SMITH: OK, and so considering where that revenue gets made up internationally and the different regions that you operate within the exit from Russia, particularly, where in the rest of the business do you expect for some of that free cash flow to be able to be put back to work in order to make sure that you're kind of offsetting any of the losses that you would have seen in Russia going forward?

TAREK ROBBIATI: So Russia, in terms of economic impact on us, was minimal. We did say in our earnings release that we, in the course of the quarter, were impacted in the amount of $250 million on revenue, one point of total margins, and $0.06 of EPS. Of that $250 million impact, Russia was minimal. The rest was really more related to disruptions in the supply chain in China.

Now in our guidance and where we see the cash flow coming, we believe it's, for us, it's a story of two components. One is the reversal of headwinds we had on the working capital level as we were buffering inventories for several quarters in a row. And two, it's also our own historic restructuring plans are coming to an end. And those restructuring costs are diminishing very, very rapidly in our free cash flow statement.

So if you take the combination of growth in earnings, the reduction of working capital headwinds, and also the reduction of restructuring costs, we feel very comfortable that we can attain our free cash flow guidance for the full year.

BRIAN SOZZI: All right, we'll leave it there. Hewlett Packard Enterprise's CFO Tarek Robbiati, always good to see you. We'll talk to you soon.