Good afternoon. I'm Beth Howe, Head of Investor Relations for HP Inc. And I'd like to welcome you to today's conference call. With me today are Enrique Lores, HP's President and Chief Executive Officer and Steve Feiler, HP's Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is being webcast.
A replay of the webcast will be made available on our website shortly after the call for approximately 1 year. We posted the releases and the accompanying slide presentations for both our fiscal 20 2Q1 earnings and HP's value creation plan we are announcing today on our Investor Relations webpage at investor. Hp.com. During the presentation of our value creation plan, we will be webcasting the accompanying slides. 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 the disclaimers in these materials relating to forward looking statements that involve risks, uncertainties and assumptions and the other disclaimers and notes included in the materials accompanying today's presentation. For a discussion of some of these risks, uncertainties and assumptions, please refer to HP's SEC reports, including our most recent Form 10 ks 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 reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP's Form 10 ks for the fiscal year ended October 31, 2020, and HP's other SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year on year comparisons with the corresponding year ago period.
For historical financial information that has been expressed on a non GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. And now, I'll turn it over to Enrique.
Thank you, Beth, and thank you everyone for joining us. HP made 2 important announcements today. First, we shared our Q1 earnings results that demonstrate our incredibly strong foundation. We also announced a 3 year value creation plan that reflects the significant opportunities ahead. We have a lot to cover today and frankly, I've been looking forward to this call for some time.
We have a winning plan. Since becoming CEO of HP 4 months ago, my focus has been to deliver on the strategic priorities I outlined during our investor meeting last year. When I talk you through our plans to advance, disrupt and transform, I made clear that we have multiple levers to drive shareholder value. And this quarter's results show that our plan is working. On the call today, we will first cover Q1 earnings and then go into detail on our value creation plan.
We will also talk about the Xerox proposal and why it undervalues HP and creates risk for our shareholders. But as I said, let me start with Q1. We are out of the gate very strong. Our team is on a mission to out innovate, out execute and outperform, and it was an impressive quarter for HP. We delivered non GAAP EPS growth of 25%, significantly above our guided range.
We have now beat or met on non GAAP EPS for 17 straight quarters. That's every single quarter since separation. We grew revenue by 1% in constant currency and non GAAP operating profit dollars by 16%. We generated $1,100,000,000 in free cash flow and we returned 84% of that to shareholders through share repurchases and dividend. These results show that we have the right plans in place to create value.
We are advancing our leadership in personal systems and print. Let me start with personal systems, where we grew revenue for the 15th consecutive quarter, and we delivered exceptional operating profit. We are creating amazing new experiences for customers while driving profitable growth and up growing the market. This team is an execution machine and we see runway for sustained value creation. We will discuss in more detail shortly.
In print, we continued making progress against our plans. Instant Ink surpassed 6,000,000 subscribers for the first time, and we saw another quarter of solid growth in managed print services. We're also disrupting industries by leveraging our technology and IP, particularly in graphics and 3 d printing. In graphics, we announced an additional $100,000,000 deal with EPAC. And in 3 d, we continue to make progress bringing together end to end solutions for customers.
An example is New Balance and SuperFit. They are offering customized 3 d printed caps for their insoles to consumers. They are using HP's Fit Station and Multi Jet Fusion printing technology. And as we advance and disrupt, we are transforming the way we work to unlock value. In the Q1, we continued to drive operational performance by reducing costs and improving efficiency.
We transition our sales force to a single commercial organization that is helping to accelerate our go to market. This includes global harmonization in areas such as pricing and as we saw in Q1, the ability to allocate supply more effectively across the globe. Most importantly, this transformation is bringing us closer to our customers and partners. We are aggressively operationalizing our plans to take structural costs out of the business and are executing our plan to deliver 40% of our gross savings by the end of fiscal 2020. We will discuss this further in the review of our value plan.
Our Q1 performance gives us great confidence in our plans for 2020 beyond. Before I turn the call to Steve, I want to briefly address the coronavirus situation. First and foremost, the well-being of our employees, partners, customers and their families is our number one priority. We are following the processes and protocols outlined by public health authorities. We are also providing resources to assist with the public health response.
From a business perspective, as you all know, the situation is fluid. We are actively working to return to full production as quickly as possible. We are working with our logistic providers to ensure we get the necessary capacity to meet customer demand. Overall, we are viewing the situation as temporary in nature, and we are aggressively navigating the challenges. Let me now turn it over to Steve to walk through the financial results for Q1 and our outlook in more detail.
Thanks, Enrique. Q1 was a very strong earnings quarter. We once again grew revenue in constant currency, non GAAP operating profit dollars faster than revenue and non GAAP EPS even faster. We are off to a strong start with free cash flow and overall we are very pleased with our results. Now let's look at the details of the quarter.
Net revenue was $14,600,000,000 down 1% year on year or up 1% in constant currency. Regionally, in constant currency, APJ grew 4%, EMEA was flat and Americas declined 1%. Gross margin was 19.6%, up 180 basis points year on year, driven primarily by disciplined execution and improved rate in personal systems, as well as improved print hardware gross margins. Non GAAP operating expenses were $1,700,000,000 down $104,000,000 sequentially resulting from significant reductions in SG and A driven by actions taken through our transformation program. Non GAAP net O and A expense was $44,000,000 for the quarter.
We delivered very strong non GAAP diluted net earnings per share of $0.65 up $0.13 or 25 percent year on year with a diluted share count of approximately 1,500,000,000 shares. Non GAAP diluted net earnings per share exclude net charges totaling $278,000,000 related to amortization of intangible assets, restructuring and other and non operating retirement related credits and other tax adjustments. As a result, Q1 GAAP diluted net earnings per share was 0 point 4 $6 At the segment level, in Personal Systems, it was a very strong quarter. Revenue was $9,900,000,000 up 2% or 4% in constant currency. By customer segment, commercial revenue was up 7% and consumer revenue was down 7%.
By product category, revenue was up 6% for workstations, up 2% for desktops and 1% for notebooks. The team continued to successfully manage our overall product mix as commercial demand remains solid while navigating the CPU supply constraints. Personal Systems has been consistently delivering profitable growth, share gains and improved mix over time. This combined with disciplined pricing and supply chain favorability drove exceptionally strong profitability with operating margins of 6.7% and operating profit dollars up 61% year on year to $662,000,000 Personal Systems OP represented 47% of HP's profit mix for the quarter. In print, we continue to make progress on our key initiatives, including growing our contractual offerings, gradually shifting more system profitability to hardware and managing supplies, all within a softer print market context.
Looking at the details, Q1 total print revenue was $4,700,000,000 down 7% nominally and 6% in constant currency. Print operating margins were 16%, up 40 basis points sequentially, driven by higher gross margins and reduced OpEx, partially offset by a lower supplies mix. Commercial hardware revenue was down 1% and consumer hardware revenue was down 13%. Total hardware units were down 10% with commercial units down 12% and consumer units down 10%. The decline in units was driven by market softness, fewer sprocket units, along with our ongoing strategy to focus on more profitable customers.
1st quarter supplies revenue was $3,000,000,000 down 7% in constant currency and in line with our expectations. We are executing against both the operational and strategic plans laid out in prior quarters. Overall, Tier 1 channel inventory levels remain below the ceilings. Let me now turn to our transformation efforts and specifically our cost savings opportunities. In Q1, about 800 people exited the company globally as part of the restructuring activities announced in October 2019.
We continue to pursue additional cost savings opportunities in addition to our ongoing productivity efforts. We now have line of sight to $1,200,000,000 of gross structural cost savings that help mitigate headwinds, create investment capacity and drop significant profits to the bottom line. We will discuss our expected 650,000,000 dollars net OP flow through in FY 'twenty two later in this call. Turning to cash flow and capital allocation. Q1 cash flow from operations and free cash flow were very strong at $1,300,000,000 $1,100,000,000 respectively.
This gives us confidence that for the full year, we will land free cash flow between $3,000,000,000 $3,500,000,000 even with the short term negative working capital impact from the coronavirus. In Q1, the cash conversion cycle was minus 30 days. Sequentially, the cash conversion cycle is down one day. We returned $691,000,000 to shareholders through share repurchases and $256,000,000 via cash dividends in Q1. Looking ahead to Q2 and FY 2020, keep the following in mind related to our overall financial outlook.
We expect that macroeconomic conditions will remain dynamic as they are today and we expect our end markets to remain competitive. We're expecting currency to have about a 1% year over year negative impact. With regards to the financial impact from the coronavirus, we are factoring in our best assumptions at this time, recognizing that the situation remains highly dynamic. In Q2, we expect a negative impact to our top line, bottom line and free cash flow, although we view the impact as temporary, with limited impact to our second half. In total, net of mitigations, we have factored in an $0.08 EPS impact into our Q2 guidance.
We are also expecting to have a significant impact to free cash flow in Q2, with negative impacts to working capital due to delayed production and manufacturing timing and backend loaded revenue linearity. Again, this should be temporary and not materially impact the full year. Turning to specific personal systems assumptions, we expect industry wide CPU supply constraints to continue to persist and we expect the cost from the overall basket of components to be less favorable compared to Q1 levels. In printing, we're assuming a year over year unit market decline and consistent with our strategy, we will remain focused on profitable customers. We expect operating margins to improve in the second half of the year versus the first half as cost actions are more fully realized.
In addition, for the full year, we expect our non GAAP tax rate, which is based on our long term non GAAP financial projection to be 16% in FY 2020. Our FY 2020 outlook assumes return of capital of at least 75% of free cash flow to shareholders, consistent with our SAM messaging. However, we will talk later about our incremental return of capital plans, which would create upside in FY 2020 and are not yet factored into our guidance. Taking these considerations into account, we are providing the following outlook. We are raising our full year fiscal 2020 non GAAP diluted net earnings per share to be in the range of $2.33 to 2 $0.43 $4.3 and our full year fiscal 2020 GAAP diluted net earnings per share to be in the range of $2.03 to $2.13 We expect Q2 'twenty non GAAP diluted net earnings per share to be in the range of $0.49 to $0.53 inclusive of our best estimates of coronavirus and Q2 'twenty GAAP diluted net earnings per share to be in the range of $0.46 to $0.50 And now I would like to hand it back to Enrique to discuss our value plan.
Thank you, Steve. Our Q1 results show a company with an incredibly strong foundation. And the 3 year value creation plan we are announcing today demonstrates the significant opportunity ahead. We have multiple levers to drive value for our shareholders and a clear set of guiding principles. Specifically, we will intensify our transformation focus in taking cost out, manage our personal systems and prem businesses to advance their lead in their market and drive a more aggressive balance sheet and capital allocation approach.
Our new financial outlook is expected to deliver $3.25 to $3.65 of non GAAP EPS in fiscal year 'twenty 2. This is underpinned by a rigorous operational plan. This management team has a proven ability to take cost out of the business, while maintaining a disciplined investment approach today and for the future. We have also proven that this is a company and a team that delivers on its commitment. This is our culture.
The strong earnings announced today are yet another proof point. You have every reason to share our confidence in the company and the opportunities ahead. Additionally, against this backdrop of strong performance, we believe additional value can be created through consolidation. In fact, instead of talking about being a first mover, we have been a first mover. Our acquisition of Samsung's printer business in 2017 is an important example.
However, anything we consider and anything we do must 1st and foremost make sense for HP shareholders. Before I go into more detail on our 3 year plan, let me address the Xerox proposal and why we firmly believe that this is not in the best interest of HPE shareholders. The Zidox proposal meaningfully undervalues HP. It creates significant risk, and it compromises the future of HP and the value of HP shares. Simply put, their proposal has a number of fundamental problems.
The first is a flawed value exchange. The Xerox proposal does not reflect the value of our company or the plan that we announced today. The value exchange simply does not work. The second is that the proposal creates a highly leveraged and irresponsible capital structure. Considering the nature of our business, which operates with a negative cash conversion cycle as well as a macroeconomic cycle, this level of debt creates significant unnecessary risk.
If resulting debt to EBITDA ratio would be the highest in the S and P hardware index. A debt leader, as Xerox is proposing, would virtually extinguish the capital returns that have been an important driver of value creation for HP. The third is the transfer of value from HP shareholders to Xerox shareholders. Their overstated synergies include many of the initiatives and cost saving activities we are already doing. It is important to keep in mind that there is no overlap between Xerox and over 90% of HP's business.
In addition, the Xerox proposal uses our balance sheet strength to acquire our company, creating value for Xerox shareholders, but not for HP. Beyond these problems, we are looking at 2 very different companies. HP is a global leader in both personal systems and print. Redox has no presence in personal systems. Zedox position in print is not nearly as robust as HP.
We are a technology leader. And with Xerox exit from the Fuji Xerox joint venture, Xerox has no long term technology or supply roadmap. HP has grown by $10,500,000,000 over the last 3 years. This revenue growth is meaningfully more than Xerox total company revenue. HP does not need a Xerox combination to create significant value for shareholders.
Now I'm excited to get to the most important news we are sharing today. The plan we are announcing shows the standalone value our shareholders can expect from us. More specifically, we expect to grow operating profit by approximately $650,000,000 with realistic market assumptions and roughly flat revenue to generate 10.7 to 11.7000000000 of free cash flow and to return 16,000,000,000 of capital to shareholders. This represents approximately 50% of HP's covered market cap and at least $8,000,000,000 to be returned in the 1st 12 months. Altogether, these plans would deliver non GAAP EPS of $3.25 to $3.65 in fiscal year 2022 compared to the $2.24 we delivered just last year.
Our significant earnings per share growth will be driven by the principles I outlined at the beginning. Aggressive structural cost reductions and ongoing productivity savings, disciplined management of our personal systems and print businesses to lead in their market and a more aggressive balance sheet and capital allocation approach. Now, I want to spend some time talking about each of these EPS drivers. I will start with one of the core elements of our value plan, which is to transform our company with our relentless focus on cost. As we outlined at our Investor Day, we are driving efficiencies to generate structural cost savings.
We have taken and are taking important actions that are driving measurable benefits. We expect our current cost reduction program to increase from the $1,000,000,000 announced in October 2019 to a revised plan of $1,200,000,000 of gross annualized run rate structural cost savings. We're also announcing today that approximately $650,000,000 of these structural cost savings are expected to flow through to operating profit. As a result of these actions, as previously announced, we are removing 7,000 to 9,000 positions or 13% to 16% of our total workforce and our restructuring dollars remain unchanged. Complementing these structural savings, we will continue to drive productivity actions across the company.
We treat this as a separate bucket that we do each and every year to maintain our competitive position in the market. This includes vendor management, material cost reduction, logistic efficiencies and more. Structural and productivity savings combined can generate more than $2,000,000,000 of savings as a standalone company. We have clear line of sight to deliver on these savings. We have defined projects across the organization to support our targets with clear owners and timelines.
Let me share some specific examples. I mentioned before the change that we are making in our sales organization. We have also consolidated marketing activities under 1 central global team. This is driving improved marketing spend efficiency and effectiveness. We are also creating efficiency in our business units and operations.
We are changing our development processes, creating R and D centers of excellence and simplifying our hardware, software and firmware platform. We have also embarked on a process to optimize the location of our factory and distribution network. We are reducing the cost of our service delivery by reducing the number of call centers, building tools to enable remote support and aggressively improving our product quality. We will be driving down real estate cost by reducing the number of locations and increasing the mobility of our workforce. And finally, we are redefining and digitizing processes to improve efficiency of our back office work.
And at the same time, this creates better experiences for our customers, partners and employees. We anticipate that we will be achieving 40% of the annualized savings in fiscal year 'twenty, dollars 75 in fiscal year 'twenty one and we will reach 100% of the savings during fiscal year 2022. Reducing cost is a never ending task and we will continue to look for opportunities to drive efficiency. Let me talk now about our business segment. Let's start with Personal Systems, where we are creating amazing new experiences for customers while driving profitable growth.
Personal Systems represents approximately 2 thirds of our revenue. As we discussed, we continue to grow the market, grow revenue and drive profit. This is a large and growing business that has further expansion opportunity with the next generation of customers and exciting new compute model. We have a winning strategy that's anchored in premium design, security and innovation to continue gaining share in higher value categories. That's exactly what we have done the past 3 years, and we are still under indexed in higher margin segment.
We're also growing the lifetime value of our installed base by broadening our ecosystem of displays and accessories and accelerating in services. And we have demonstrated meaningful progress in driving cost advantage across our platforms and our end to end delivery system. Looking forward, we expect to grow personal systems revenue at or better than market, while expanding our long term operating margin target to 3.5% to 5.5%. We feel great about the trajectory of this business and our team's ability to execute. Turning to print, we have an incredible business in the large $200,000,000,000 plus print market.
We are the market leader in size, scale, profit and innovation across office, home and graphics printing. And in a mature industry, everyone wants to be a leader. At the same time, we are still under indexed in attractive categories like contractual in office printing. And as we drive a more consistent customer experience across our full print portfolio, we are confident that we will achieve significant cost savings and productivity gains. We continue to execute on our strategy to increase supplies share and to evolve our business models over time by growing contractual sales and optimizing system profitability with improved hardware margins.
In addition, as I previously mentioned, we will also expand our solutions in graphics, 3 d printing and digital manufacturing. This plays an important role in our long term plans. And HP's decades of investment have created a leading portfolio of technology and intellectual property that we are monetizing to create new sources of value beyond hardware across key industrial markets. Across our Print segment, we are executing a strategy that will advance our leadership, disrupt industries and transform our business to improve our profitability. As a result, we are setting a long term operating margin target for print at 16% to 18%.
Let me now hand the call over to Steve, who will go into more details on the financial plan, starting with optimizing the balance sheet.
Thanks, Enrique. An important part of our value creation plan is driving a more aggressive balance sheet and capital allocation approach. We are establishing a new capital structure model with a target gross leverage ratio between 1.5 to 2 times gross debt to EBITDA. In addition, we have announced a new capital return program, both in the short term and long term, which will utilize HP's balance sheet for the benefit of HP shareholders. Our capital structure will still preserve our ability to pursue disciplined and accretive M and A and to continue to grow our dividend at least in line with earnings.
The plan builds on HP's strong history of returning capital to shareholders. Looking forward, we expect to return approximately $16,000,000,000 to shareholders over the next 3 years, with at least $8,000,000,000 of shares repurchased in the 12 months following our 2020 annual shareholder meeting. To support this plan, the Board has increased the total share repurchase authorization to $15,000,000,000 an increase from the $5,000,000,000 we announced in October 2019. This increased capital return will be funded by deploying excess cash on HP's balance sheet and available debt capacity. We remain committed to maintaining an investment grade rating.
We are also increasing our long term return of capital target from approximately 75% to 100% of free cash flow unless higher return opportunities emerge. We have a strong value plan reflecting the significant opportunities across our business. It is a plan built on realistic assumptions, And it is a plan that combines operational earnings growth with enhanced return of capital to shareholders. I'll bridge our non GAAP EPS from FY 2019 to FY 2022 in 3 parts. Starting with the earnings contribution from our Print and Personal Systems business segments, we're expecting an increase of $0.41 plus or minus from FY 2019 to FY 2022.
This assumes approximately flat company revenue during this period, consistent with the growth across our weighted portfolio TAM. We remain well positioned to continue outgrowing our markets, improving our mix into higher growth and margin categories, all while managing improved supplies revenue declines over the 3 year period. Importantly, the primary driver of the expected operating profit growth is the high confidence $650,000,000 net flow through from our transformation cost takeout program. 2nd, we have $0.35 plus or minus from shares and other using our previously guided 75% capital return. This base operational plan would generate between $2.90 to $3.10 non GAAP EPS in FY 'twenty two before any enhanced return of capital.
Finally, we add in the benefit from the incremental capital return program announced today. The upfront share repurchases along with 100 percent return of free cash flow target over the years ahead. This would generate another $0.45 plus or minus. In total, our FY 'twenty two non GAAP EPS range is between $3.25 $3.65 We hold ourselves to high standards and it is the HP way to consistently achieve the goals we set. We take a disciplined approach to capital allocation, including M and A and return of capital.
We have experienced acquiring and consolidating, as well as separating and divesting, and we have returned a significant amount of capital to shareholders. And we've done all of this while executing globally across both personal systems and a print portfolio and creating new businesses and revenue streams. That's the foundation we have built at HP. It's one that you can trust. And it is grounded in a purpose driven values of making sustainable impact and doing business the right way.
Now, I'll turn the call back to Enrique.
Thank you, Steve. The details we have shared today show that HP has a path to attractive value creation and a compelling investment thesis through execution of our standalone plan. Additionally, we believe consolidation on the right terms could create incremental upside to this plan for HP shareholders. HP is reaching out to 0 to explore if there is a combination that creates value for HP shareholders that is additive to HP's strategic and financial plan. I'm confident in this next chapter of HP.
We will be more aggressive, nimble and focused, and we have multiple levels of value creation. Now let me stop there and open the lines for your questions.
Thank you. And we will now begin the question and answer session. And our first question will come from Shannon Cross of Cross Research. Please go ahead.
Thank you very much and thank you for the detailed explanation of your strategy going forward. I wanted to follow-up on the commentary that you made at the end in Reykjavik about that you're reaching out to Xerox. And I'm curious as to sort of steps and then also what
metrics would you
need to see to pursue a deal? And you probably want to talk more generically, but just in general, how are you looking about that? And how are you thinking about consolidation overall within the industry? And then I do have a follow-up. Thank you.
Sure. Thank you, Shannon. I think any conversation we will have needs to address the 3 issues that we outlined during the call. First, we need to make sure that the value exchange between the two companies reflects the real value of each of them. 2nd, the resulting entity needs to have a capital structure that makes sense and that will be able to address the needs of the businesses that we will be running.
And third, it needs to be based on synergies that are realistic and that can be achieved. This is a conversation that we think is possible to have at this point, And this is what we have opened the communication to open engagement to talk about.
Just double click for a second. On the three dimensions that Enrique described on the first one on the value exchange, just to put it numerically, given our outlook, Xerox offer today is roughly a 7 times PE for HP. And if we look at consensus on Xerox over a similar period, they're as of last week in closer to the 9.4 range. So a striking difference in the respective valuations despite the fact if you look at our performance, HP has been growing and Xerox has been declining. The quick double click on the irresponsible capital structure, there's no hardware company S and P index with a leverage beyond 3.5%.
And so we view it as irresponsible. Candidly, if we just reflect on the current situation with coronavirus and the working capital required to run our personal systems business, really important that you have that flexibility in your operating cash as we do today. And then the third one on the synergies, it's important that our investors get the benefit of HP's cost to takeout program and not Xerox taking credit for it in terms of the synergies they're claiming.
And let me add one more thing. Our number one priority is to execute the plan that we have outlined today. We have an opportunity of creating very strong value for our shareholders, and this is what myself, Steve and the rest of the team are uniquely focused.
Great. Thank you. And then I just wanted to clarify that you're taking up your cost reduction to $1,200,000,000 and specifying $650,000,000 flowing through the bottom line. I'm kind of curious as to what you've seen that's incremental that's driving that? And also, you'd mentioned 2,000,000,000 dollars over time.
Is that a longer term target? Just any clarity there. Thank you.
Yes. So maybe I'll clear up
the numbers. So what we announced at SAM in October was a $1,000,000,000 gross run rate savings by the end of FY 'twenty two. At the time, we did acknowledge that that was to cover business headwinds to invest in the business and we'd have some drop to the bottom line and we didn't quantify that drop. What we're announcing today is that $1,000,000,000 goes up to $1,200,000,000 in FY 'twenty two and not by the end of FY 'twenty two and that there would be a 6 $50,000,000 net drop from that. The confidence comes really from the start out of the gate, given where we see the headcount reductions that have taken place thus far, the continued work we've done over the prior 3 months.
As we said, we'll always look at taking additional cost out and we'll communicate them when we have line of sight. And so since we have line of sight, we've increased it to $1,200,000,000 In addition to that, what we didn't specifically quantify in October, but it's important for our investors to understand is we also have ongoing productivity initiatives and actions. This takes place every year. It always does at HP where we see more than $1,000,000,000 of productivity. Think about this as vendor management, supplier management, pricing efficiencies, which we drive day in and day out.
That's really used more just to make sure that we are competitive in our markets in our business. And so what's really important is the structural cost reductions, and that's now $1,200,000,000
But as Steve said, as we said in October and we said it today, we will continue to look for opportunities to become more efficient. Removing cost is an activity that never stops, and we will continue to do that and continue to improve the efficiency of the company.
Our next question will come from Katy Huberty of Morgan Stanley. Please go ahead.
Thank you. Good afternoon. Commend you on the very aggressive capital return plan. In that context, maybe this is a question for Steve first. If and when the PC market growth turns negative, how do you plan to manage through the negative cash conversion cycle and the potential impact to free cash flow so that you can continue to meet this new share buyback commitment?
Sure. Yes, it's really a fundamental part of our overall capital structure. And as we said in the prepared remarks, our new target debt or leverage ratio is 1.5x to 2x. It's important that we maintain investment grade and have confidence that operating within that range will do so. And the reason for that is a few fold, one of which is what you just described.
It's important that we can manage across economic cycles and particularly with our personal systems business and ensure that we have sufficient cash for operations. Also, given what we've announced, we think our capital structure still supports our ability to invest and look at accretive, disciplined value based M and A and really take advantage of the financial and debt markets as they arise.
And let me add one comment. As Steve said in the prepared remarks, we have very realistic market assumptions that are supporting this plan. And basically, we are expecting flattish revenue. So this is also an important plan of the confidence that we have about this plan.
So that actually connects to my follow-up. The operational earnings growth over the next 3 years is $0.41 That entirely ties to the $650,000,000 of cost savings. So as you say, there's no revenue growth. There's no benefit from margin expansion as you mix into higher value PC categories as the supplies trajectory improves. And so just some context around why you're not betting that operationally you can grow earnings beyond the cost savings over the next 3 years?
Yes, I would say, first of all, the plus $650,000,000 is a plus or minus, right? And so, we obviously have proven in the past few years our ability to profitably outgrow our market and also do so in categories where we're under indexed and have higher long term growth and margin accretive potential. That being said, we did want to take a realistic view of the opportunities in markets that we see. We do see and would expect certain parts of our portfolio to continue to grow and we would expect there will be parts of our portfolio that we continue to expect some declines, supplies being one of them, although we do expect that the supplies declines will improve over the period.
Our next question will come from Toni Sacconaghi of Bernstein. Please go ahead.
Yes. Good afternoon and thank you for the presentation and all the detail. I'm wondering, you did talk about reaching out to Xerox to explore a combination, but it doesn't sound like you're open to being purchased by Xerox at any price, let's say, $30 a share or more, simply because under any raised price, you would still have the same grievances. Is that correct? So are you if I literally follow your logic, it sounds like you're not open to being purchased by Xerox and Xerox having a majority control of the company under at any price.
Is that fair?
At this point, Tony, I don't think that who buys what is a real conversation. The real conversation is to make sure that either 2 companies get together, we address the issues that we outlined during the call. 1st, we need to make sure that the valuation of the 2 companies is fair based on the value that both companies are going to be bringing to the joint entity. We need to make sure that the resulting capital structure makes sense for the businesses where we will be operating. And we need to make sure also that there is a fair, a clear assessment of what the synergies are.
This is I think the important conversation for our shareholders. Once we clarify that, then who, how are things that will be discussed after that.
Okay. Thank you. And if I could just follow-up, could you, A, just clarify what your expected supplies growth is through 'twenty two in terms of decline per year? And then maybe you can comment on what feedback you've received from investors about this proposal? And the reason I ask is, you're effectively saying what we outlined in October was $3 a share in 20.22 and the stock market reacted with a share price of $17 or $18 for HBQ.
Now you are effectively taking that up to 3.50 dollars but it's not dramatically different and your stock price is up 33% since then. So I'm wondering, A, what feedback did you receive from investors over the last couple of months since the Xerox offer has come to be? And why do you believe that the market will view earnings that are 15% higher as being an entity that's dramatically higher value than the price they were willing to ascribe to the company shortly after the Analyst Day? Thank you.
So let me take a first crack at that. So I think there's a couple of things just to start with, the first of which is, just to remind everyone, we did over deliver on our Q4 results after our Analyst Day and we significantly over delivered on our Q1 results announced today as well as now 2 increases in our full year 2020 outlook. So that's point 1. Point 2 is what we didn't share in October and what we are sharing today is the underlying financial plan that is consistent with the strategy described at our Security Analyst Meeting. And that plan in and of itself it's why we bridged it the way we did, would deliver between a $2.90 to $3.10 non GAAP EPS in FY 'twenty two before any of the incremental increased return of capital discussed today.
So I think those are 2 important data points that have not been shared with our I guess the earnings beat has, but the value plan itself, this is the first time we're talking about it in this level of detail. And I think it's important facts and assumptions that would support the investor dialogue, which we continue to have and will continue to have.
And when I got this question in the past, I always said that we were undervalued because our financial plan was clearly delivering higher value. And this is one of our objectives of sharing this today because now this analysis can be done openly, and it will clearly reflect what is the real value of this company.
Our next question will come from Amit Gheriani of Evercore. Please go ahead.
I guess Enrique, when I think about the updated capital allocation narrative, I'm wondering how does M and A fit into your thought process as you go forward? And specifically a question we get raised often is, will HP turn around and look to acquire Xerox at some point? So I'd love to understand how do you do M and A broadly? And you can talk about this perhaps with Xerox specifically.
Well, let me start and then maybe Steve will provide more detail. The way we have designed the capital structure will provide us flexibility to continue to drive accretive M and A with solid return on investments that will be aligned to the strategy that we have described. We have increased the debt that we are going to be taking, but still we will have enough room to drive the M and A that we will consider appropriate.
Yes. I mean, the only thing I would add is, again, we intend to operate between the 1.5 to 2x leverage ratio. It's important for us to maintain investment grade. And we believe that still gives us the capacity to do what's still an important part of our strategy, which is M and A. Got it.
And then if I just come back to the fundamentals in the quarter that you guys just reported, supply that you see feels like it's starting to stabilize, the down 6%, 7% range for a few quarters now. I'd love to understand your perspective on how fiscal 2020 stacks up, especially because compare start to get easy in the back half of supply. And then any feedback you're getting from your customers or channel with a new pricing model?
Sure. I won't kind of give any specific guidance as it relates to Supplies revenue other than potentially to provide some color commentary. Certainly, as it relates to our 3 year plan, as I mentioned, we are still assuming the Supplies revenue will decline, but we expect it to decelerate and improve over time. The reason for that, there's a few things. First of all, we're expecting that the supply share will improve throughout the period.
Reasons being our strategy, we're shifting more to contractual based models, both in the home and office. Enrique commented that Instant Ink is now over 6,000,000 subscribers. Number 2, we expect to continue growing our industrial businesses, graphics, 3 d. Number 3, we expect to shift more of our customers to our end to end systems. Now this is going to evolve over time, but that certainly should help supply share.
And finally, operationally, we're driving changes. We've talked about EMEA, but also executing some of the wins we saw on the ink side where we've improved our supply share into the toner side. So those should all help our supplies trajectory over time. I would call out that we still have declines in installed base and especially in homes. So there's definitely offset to that, which is why we're still expecting a decline throughout the period.
But let me emphasize one of the points that Steve made. As a consequence of the strategies that we are driving, we expect the 3 the print business to be a much stronger business 3 years from now than it is today. We will have fewer and profitable customers and we are sharing some details about that today. We will have higher share of supply. We will have better hardware margins.
We will have a higher percentage of contractual business, both for consumers and for businesses. And there will be a higher mix of growth businesses like graphics and 3 d. So as we execute our strategy, we are really driving a significant improvement of the quality of the print business.
And our next question will come from Amanda Barra of Loop Capital.
Hi, good afternoon. I appreciate you guys switching me in here. Yes, 2 if I could as well. Could you just talk about with regards to coronavirus specifically what's being impacted from a componentry perspective as well as a production perspective? That would be helpful.
And then I have a quick follow-up.
Sure. Let me start. So as we talk about the coronavirus, always our first thoughts are with our employees, partners, customers and their families because we have a large number of them in the countries that are being affected impacted. At the same time, we need to acknowledge that if I focus on the business side, the situation is fluid. And our number one priority our number one problem is manufacturing capacity, both for personal systems, for print, hardware and supply.
We are working very aggressively with our manufacturing partners and suppliers. I personally have been in contact with most of the CEOs to accelerate the recovery. We are seeing some improvements. But as Steve mentioned, we are expecting to see still to see some impact during Q2.
Yes. I'll just I think it's important to reiterate that this is a dynamic situation. Our guidance just factors in the best information that we have today. We do view the situation as ultimately a temporary situation that we'll work ourselves through. As Enrique indicated, we are expecting that it would impact both our personal systems and print business hardware and potentially Supplies as well in Q2.
The impact will be felt across our units, revenue, profit and free cash flow. We have factored in, as I said in my remarks, an $0.08 net impact and negative impact in our Q2 outlook, and we're not expecting any material impact in the second half. So that's what's assumed in our guidance. As it relates to free cash flow, I do want to note that given the delayed manufacturing and production, that is likely to make Q2 to be a more back end loaded revenue quarter and therefore be negative to cash flow as well as from outstanding perspective, the timing of the manufacturing could also pressure working capital there. So it is likely to have a negative impact to our Q2 free cash flow results, again temporary.
That's helpful. Thanks. And if I just on cash, if I could squeeze one more in. What how is there an opportunity to the cash for the cash you'll be using for the share repurchase? And how would you like us to think about that opportunity cost?
When you say cash, are you talking about cash flow or cash on hand?
Sorry. Well, for the cash that you could for the cash usage that you will be using for the share repurchase, I can think that M and A potentially could be somewhat impacted. But would there be any other areas that perhaps you kind of pull back on investing in to let it flow to free cash flow that you would then use for that share repurchase?
Well, I mean, obviously, we'll continue to look for returns based opportunities to invest. And if we see those, we'll make those investments. If we don't see those, then there's always opportunities to drop more to the bottom line. We'll continue to aggressively lead in our markets, as Enrique said in his remarks. And again, if that leads to upside opportunities that can drop more to the bottom line.
That being said, our 3 year cumulative free cash flow outlook is between $10,700,000,000 to $11,700,000,000 It's one of the strengths that we've seen in the past and would expect going forward, which is we generate a lot of cash at HP.
And our next question will come from Paul Coster of JPMorgan. Please go ahead.
Yes. Thank you very much for taking my question. First up, can you just talk us through the timeline here for when the annual meeting is and when you'll have the discussion extent in this fiscal year the debt will be sort of front loaded to enable the purchase of shares?
Well, in terms of the date of the shareholder meeting, we will defined. In terms of the engagement with the Xerox team, it's something that has actually already started. And we will be reporting on that, but we will have to based on regulatory obligations.
In terms of debt, I mean, the debt and the actual execution of the increased share repurchase, 1st and foremost, we're going to get out and engage with our shareholders and we'll provide greater clarity in terms of kind of the timing and ultimately the structure and debt levels as we get closer to the execution.
Got it. Okay. My follow-up question is, obviously, this is a really interesting value creation plan that you've outlined here. And if it's a good idea now, why wasn't it a good idea back in October? And what do you think you may have done by way of compromise in order to bring out the plan now versus back then?
Sure. So first of all, let me remember that when we had the investor meeting in October, I was still not the CEO, and I have been the CEO of the company only for 4 months. During these 4 months, I have worked with the team and all the team had worked to really look for ways to accelerate the value that we can demonstrate our ability to execute in Q1. We have done this today, presenting very strong results, and this is why we are having this conversation today.
I would want to add in the October timeframe, we did announce the Board's approval for the largest share repurchase authorization in the history of HPQ as a standalone company, both in terms of dollars as well as a percentage of our market cap. Because as we said at the time, we do view our shares as significantly undervalued. So we did say that at the time.
Our next question will come from Matt Cabral of Credit Suisse. Please go ahead.
Thank you. In your presentation, you mentioned roughly $1,000,000,000 of potential synergies created through the combination with Xerox. Can you talk a little bit about how you arrived at that number and just the biggest differences you see versus the plan that Xerox has put out there?
Sure. Let me take the question. So we have done a lot of work internally to base in public information trying to estimate those synergies. And also, we had a company that is specialized this to validate some of our key assumptions. And we reached kind of the conclusion that Steve mentioned before that synergies are in the range of $1,000,000,000 I want to remind everybody that the overlap between the two companies is relatively small.
From our perspective, it's less than 10%. So really, we need to always have that in mind when we talk about synergies. Having said that, around 40% of the synergies will be in cost of goods sold, around 60% of the synergies are in the OpEx side. This will give you a high level estimation of
the synergies. I think it's also important to just reflect upon the flow through. And what we've heard is that there's an assumption of 100% cost flow through to the bottom line that Xerox has proposed. It's certainly not anything that's being achieved today in their cost takeout plans. And so I think we've reflected on that.
And again, I think it's important that whatever the synergy number is, it's an incremental synergy number and doesn't duplicate the cost plans that HP is already executing. And candidly, that Xerox seems to be executing on their side as well.
And this is a fundamental part. We are driving significant cost out of this company, and the value of that needs to go to HP shareholders. This is their money. This is why we think a big part of why the current proposal doesn't work for HP shareholder.
Got it. And then really strong EPS upside in the quarter, but it looks like your full year guidance went up by a little bit less than the Q1 beat. Can you help us understand if there's any pull forward or anything one time in the Q1 and why we shouldn't expect the margin upside to continue for the balance of the year?
Yes. So we increased our full year outlook by $0.10 I think what we've demonstrated that is we do have multiple levers to drive profit at the company and our outlook does assess the various risks and opportunities that we see. Maybe just a few high level points. The first is we have factored into our guide and certainly see it in Q2 the impact of coronavirus. We see it as a temporary issue at this point.
Again, it's dynamic. But that is both in Q2 and does reflect our overall full year guide. In the second half, Personal Systems is going to have a tougher compare, whereas print should show a better compare and year over year improvement. But also second half and I think what's important is we do expect to see more of the structural cost reductions in savings and we have increasing confidence in that. You factor all those elements together, which is why we increased the full year by $0.10 and we've got confidence in delivering that, albeit the coronavirus remains dynamic.
Our next question will come from Jerry L. Ng of Deutsche Bank. Please go ahead.
Yes. Thanks for letting me ask questions. So I want to just want to put together a couple of bread crumbs together and just paint a picture here. So it seems like you mentioned you reach out to Xerox offers a combination, yet you've mentioned a repurchase, which appears like it will require to raise some debt if you're to complete in a quick managed guide to. And finally, there's a commitment to this gross debt to EBITDA of 1.5 to 2 times.
How do we reconcile the idea that if you were to pursue a combination of Xerox, the combination of deal and repurchase could push you over the leverage that you've committed to?
Well, I guess, 1st and foremost, we've got a strong balance sheet and we don't necessarily look at this as an either or proposition. I mean, our return of capital and capital structure is really designed to return significant capital, also preserve the optionality around M and A if it's ROI based and disciplined and accretive to the company that could create value for our shareholders. Clearly any specifics or hypotheticals really matter about what any potential transaction could look like, so won't comment on that. But our capital allocation will remain disciplined and responsible and strategically deployed to drive value for the company. And we think the 1.5 to 2 times target leverage will allow us to do so.
Got it. Appreciate that. And one fundamental one if I can. You mentioned a raise on both sides, Personal Systems and Print margins. I want to ask versus perhaps back in October, what gives you confidence in that raise?
Yes, our long term margins for Personal Systems, it's fundamentally driven by the structural improvements we have made and would expect to be making in our mix. You've seen that underlying our results over the past many quarters, certainly in the most recent quarters also helped by some of the supply chain cost favorability, but the mix really helps. And then the cost takeout, the cost takeout should help both personal systems and print, both in the short term and long term.
Our next question will come from Rod Hall of Goldman Sachs. Please go ahead.
Hi, this is RK on behalf of Rod. Thanks for taking my question. I wanted to ask about the Windows 10 cycle. Where do you think we are? And could you comment on your expectations for commercial PC trends going forward?
Sure. As we have said before, we are very confident in the trajectory of the Personal Systems business going forward. There is a very large installed base that is that we can drive and upgrade to some of the new volumes, some of the new units that we have. And we think that we have an opportunity to mitigate any impact that the windows 10 refresh may have going forward.
Yes. And what we saw in Q1 was our demand remains solid, certainly on the commercial side. And so I think that's an important factor. Ironically, I think the coronavirus may ultimately push out some of the Win 10 refresh timelines, given some of the constraints we're going to see in Q2. So that could support a better second half than we originally anticipated.
Additionally to some of the shortages we have seen on processors during the last quarter. So this is really smoothing out the transition to the new system. Thank you. And on the coronavirus impacts, does your guidance include any impacts to demand outside of China?
No, the guide really reflects the economic conditions as we saw today. And the demand impact was really China based as well as the supply chain and logistics impact from the China production and manufacturing.
Great. Thank you. And as we said before, the biggest impact is driven by the supply chain impact. That, of course, will have an impact in sales all over the world.
This concludes our question and answer session. I would like to turn the conference back over to Enrique Loraz for any closing remarks. Please go ahead.
Thank you, everybody, for joining. As you have seen during the call, we are very confident in the plans we have laid out today. We will build on our discipline and sustain cost reduction actions to drive overall operating profit and cash flow across our business. And we will keep evolving so we can become a better, leaner, more digitally driven company. My number one priority is to execute the plan that we have outlined today.
Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
I am Enrique Lores, President and CEO of HP. Today, in addition to reporting strong financial results for the Q1, we are outlining our plan to create value for our shareholders in both the near and long term. In this video, you will meet key members of the team to help you to understand our position of strength and why this is the right team to lead HP forward. HP has a clear strategy to create value for shareholders, and our strategy is working. We are advancing our position in personal systems and print.
We are disrupting industries with breakthrough technologies across graphics, 3 d printing and digital manufacturing. And we are transforming how we work to continually optimize our cost structure and create the capacity needed to reinvest in innovation. As part of our value creation plan, HP's Board has approved a new capital return policy that we expect will return at approximately $16,000,000,000 This program will utilize our balance sheet for HP shareholders benefit. It will preserve our ability to pursue disciplined M and A as well as to continue to grow our dividend at least in line with earnings. You can also expect us to win the right way.
As a leader, I have always believed that how you do things is just as important as what you do. I am proud that Newsweek recently named HP America's Most Responsible Company. Owners like this reflect our team's ability to deliver for shareholders today while paving the way towards a brighter future.
My message today is about our confidence in the future. HP delivers on its commitments. We plan to deliver significant earnings per share growth, driven by increased operating profit in personal systems and print, structural cost reductions and ongoing productivity combined with the right investments for our future, strong free cash flow and an optimized balance sheet. HP's operational strategy and financial plans are based on realistic market assumptions, proven execution and leadership across our portfolio, cost reduction opportunities that are already being executed and growth businesses that already exist. We see significant operational upside ahead.
Over the last 3 years, HP has returned $9,100,000,000 or 80% of free cash flow to shareholders. Looking forward, our strong balance sheet and robust free cash flow generation provide us with multiple levers for value creation. We are highly confident in our ability to continue delivering on our commitments.
As Chairman of the Board of HP and an independent director, my responsibility is to ensure the right decisions are being made to drive long term value creation. The Board and I take this very seriously, and I'm proud of what HP has accomplished in this regard since the time of the separation. This is one of the world's most iconic and most trusted brands with a highly differentiated technology and intellectual property, huge global scale and reach and incredible talent at all levels of the organization. HP is building from a position of great strength. Our multiyear plan includes 3 year financial targets, reflecting our unwavering commitment to shareholders.
To execute this plan, HP has a highly experienced management team. Enrique is the right leader to drive HP forward. The Board and I are united behind him as CEO. HP's Board is comprised of world class directors with a diverse set of skills and expertise needed for a global technology leader, including in the areas of disruptive innovation, sound corporate governance, value creating M and A, disciplined capital allocation and prudent cost management. The Board and I are very confident in HP's future.
HP shareholders can count on us to continue delivering on our commitments to create value.
In Personal Systems, we are creating amazing new experiences for customers while driving profitable growth. Personal Systems is a large and growing business that has further expansion opportunity with the next generation of customers and exciting new compute models. We have a winning strategy that's anchored in premium design, security and innovation to continue gaining share in higher value categories. That's exactly what we've done in the past 3 years and we are still under indexed in these higher margin categories. So we have room to grow.
We expect to grow Personal Systems revenue at or better than the while expanding operating margins to 3.5% to 5.5%. This is a great time to be in personal systems. We are creating the compute experiences of the future.
We have an incredible print business. We are the leader in size, scale, profit and innovation in office, home and graphics printing. And yet, we're still under indexed in attractive categories like contractual office printing where we've led the industry consolidation. In 2017, we acquired Samsung's printing business. Having personally spent a year in Korea leading the integration, we were able to demonstrate cost takeout while driving incremental revenue opportunities.
We're executing a strategy that will continue to advance our leadership, better deliver customer experiences and improve our profitability. As a result, we're increasing our long term operating margin target for print to 16% to 18%. We will continue to be the most innovative printing company in the world, bar none. Graphics and 3 d printing play an important role in our long term plans. HP's decades of investment and innovation have created a leading portfolio of technology and intellectual property, And we're monetizing this portfolio to extend beyond the hardware by building a complete solutions ecosystem that new sources of value across key industrial markets.
We believe in the power of print and we will continue to lead the industry forward.
Our customers and 250,000 channel partners worldwide are at the center of everything we do. I talk with them every single day, and I can tell you there's an incredible excitement about HP's future. Our new commercial organization places us closer to our customers and partners than ever before. We are driving operational efficiency through a consistent go to market strategy with globally standardized tools and processes enabling a consistent execution of the 4 piece of marketing. This consistency has contributed to the significant cost savings we are generating worldwide and has enabled us to become a simpler, faster and more agile company, poised to build on our success and accelerate our momentum.
We are delivering more and more personalized services and solutions to meet changing customer needs. It is what we call the segment of 1. This requires us to harness new technologies to become a more data driven company, which both enhances the customer experience and reduces our costs. Our customers and partners like where we are heading. We are reimagining what's possible, and we are enabling the outcomes that they need to be successful in the future.
Our results reflect the kind of company we have built, laser focus on execution and delivering value to our shareholders over the short and the long term. And our 3 year financial plan shows that we don't plan to slow down anytime soon. Thank you for your support of HP. We are writing a new chapter in the story of this great company, and I know it will be our best one
yet.