Cisco Systems Inc and UBS to Host ESG Conference Call/Webcast Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : How does driving sort of the ESG agenda that you just laid out get captured in Cisco's long-term view around returns? I.e., is it factored into investment decisions quantitatively? Or is it just qualitatively factored into sort of the road map put forth by the management team and the Board of Directors? Mary de Wysocki Thank you for that question. We know in order to mitigate the very worst impact of climate change, the global community -- the global business community, in fact, must step up in a very big way. Our customers are expecting us to do that as well. We see a dramatic increase in the number of RFPs that include at least one or more topics on ESG. The tech community has a particularly important role to play. Research shows us that the tech industry is responsible for, let's say, between 2% and 4% of greenhouse gas emissions. But if you look at certain reports, for example, one out of the UN, existing ICT solutions offer the potential to suppress 15% of current emissions. I think this means the tech industry has a really unique opportunity to contribute to society's transition to both the digital and a greenroom of living and working, and making that world inclusive as well. Therefore, when we think about our business strategy and our technology road map, sustainability, inclusion is deeply embedded. I already mentioned our commitment to reach net zero by 2040. Another example is how we're adapting our business model to really reduce the resources we consume and the waste we generate. So this really focuses in on how we design and manage our products through multiple life cycles. How do we design that in from the beginning? Enabling us to think about how our products will be reused, remanufactured, repaired, as well as upgraded. So one of the things we've done is committing to a goal where 100% of new Cisco products and packaging will incorporate circular design principles by FY '25. I think one really good example that I might bring up is our updated IR 1101 industrial router. It really allows for modular upgrades and repairs, which extends the life of the product. So modularity eliminates the need for the customer to refresh the infrastructure every few years. Instead, they can add or upgrade components as their needs and technology evolves. On top of that, this updated product really looks at how we think about the need of the customer as they think about refreshing their technology. So it's not just modular, but we also look at incorporating in idle power. Can we manage the power. So the router's, idle power, you can actually design it in where we can reduce 45% by managing the power, reducing carbon emissions and eliminating foam from its packaging. I think a great example of how we worked with a customer is with Ash Ray. It's a world-leading building standards organization. What's interesting is 20% or more of energy-related greenhouse gas emissions comes from buildings. So when we really think about innovation, technology road maps, that's one area that we're really focused in on. So Ash Ray, they wanted to move their new corporate headquarters, so they partnered with Cisco and NTT to retrofit the 43-year-old building into something that's far more secure, innovative and sustainable. So by using PoE or Power over Ethernet, creating a foundation powered by Cisco, they can now have all their systems managed over the network through an integrated building management system. So between heating and cooling optimization, on-site solar and other energy management solutions, the building consumes less power than it generates. It's these kinds of forward-looking solutions that we're building into our strategy as well as our technology road map. And speaking of power, power efficiency and capacity and capability have really become a key buying decision. And our Silicon One chipset to go quantum leap forward in both. Now, you can find Silicon One in several of our products, including the Catalyst 9000, which is the Cisco 8201 router, which drives internet data transfer across web scale and service provider networks. And what's really important is when you compare previous REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 10, 2022 / 4:00PM, CSCO.OQ - Cisco Systems Inc and UBS to Host ESG Conference Call/Webcast routers without Silicon One, the 8201 now uses 96% less energy and delivering 35% more bandwidth and uses 48% less space. So we're really looking at all of those dimensions as we think about our product and business strategy.

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : So Mary, maybe, if I just quickly follow up on that point. So obviously, it sounds like you work very closely with your suppliers in terms of evaluating their performance and their adherence to sort of the standards that you've set. And granted the supply chain challenges right now are somewhat unique, hopefully, going forward. But what if some of your suppliers have difficulty or persist in difficulty in achieving sort of the milestones that you set forth? What's the fallback? So what's the option or what's the alternative? How should we think about that going forward? I think heading into this in the last 2 years, many of the investors that I've talked to never would have considered supply chain to be a gating factor for the business, more importantly, a consideration from an ESG perspective near term, at least. So I just would love to get your thoughts. Mary de Wysocki Yes. Thank you. I think the pandemic really -- it just has reinforced all the focus and programs that we had in place. And it really showed how critical it is to continue to engage our suppliers on improving working conditions and worker safety. So over the past years, we've really worked to create that flexibility and adaptation. And I think one of the ways is how we monitor the development of response plans, whether that be to minimize workers' exposure to the virus, for example. So because it's top of mind, we've offered a number of programs to our suppliers to improve that worker management communication. For example, in the most recent fiscal year, we help sponsor 4 suppliers to participate in a program, a partnership with the social accountability International [Tensar] program. This is a workplace engagement program, which really seeks to unite workers and managers to identify workplace challenges that they can collaborate on to solve over the course of 100 working days. So through this program, participants, they really learn strategies for problem solving, communication and leadership that they can apply to future challenges, both the current and future. Another topic that is really critical is how do you reduce forced labor and you protect the most vulnerable of our workers. And we know certain populations of workers are more vulnerable to exploitation such as migrants from other countries or student workers. So we assess these risks to these vulnerable workers and its supply chain. And if an issue is uncovered, we are sure that the workers are made whole. So for example, migrant workers sometimes have to pay these recruitment fees in order to get a job in another country. And then they must pay it back, those fees over time, which is really considered a risk of debt bondage or a form of forced labor. These fees can be 150% or more of their monthly salary. So in FY '21, we oversaw the reimbursement of $200,000 to more than 4,000 workers in our supply chain who had been impacted by a health check or recruitment fees. How is this done? It really is a part of our supplier code of conduct, and that covers labor, health, safety, environment, ethics and management systems. And we get -- we monitor the adherence. And so when we do this evaluation on an annual basis, whether it's a social or environmental risk factor, we then take a look at how do we work with those partners. We've adopted the Responsible Business Alliance, the standards of accountability and many of their assessment tools. So for example, RBA has a self-assessment questionnaire, which help suppliers understand and create insights on their own performance. And it also helps us at Cisco develop leading indicators for risk that can be addressed during our audits, or other due diligence initiatives. So we do conduct announced on-site third-party audits of prioritized suppliers to assess their conformance to the code. We require regular audits of manufacturing partners every 2 years. And every year, we audit at least 25% of component supplier facilities that are deemed high risk according to our annual risk assessment process. These audits cover more than 200,000 workers in our supply chain each year. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 10, 2022 / 4:00PM, CSCO.OQ - Cisco Systems Inc and UBS to Host ESG Conference Call/Webcast Now, if a supplier doesn't meet those standards, we hold them accountable. But we work with them to ensure these issues are adequately addressed and closed. We really want to understand where they are. Not just corrective actions, but really, understand the issues, how do we improve understanding and performance over time. Now, we have published the aggregated findings of our audits each year in Cisco's ES&G reporting hub. There you can find analysis of our top findings, various case studies, information on how we train suppliers to promote that healthy and environmentally responsible workplace. As I mentioned earlier, this supplier scorecard, that helps inform us of what are the decisions and the path forward to work with our suppliers. Audit performance and closing nonconformance in a timely manner are proven measures that really factor into those scores.

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Thanks, Julie and thanks, Mary. So I've been getting a couple of questions in over e-mail, and I want to kind of maybe tie them together. And it just kind of -- one of them kind of goes hand-in-hand with what you just talked about from cyber. Historically, Cisco, as many people on this call probably are well aware, has been somewhat acquisitive in terms of adding capabilities and technology to the portfolio where they didn't have it in-house. Basically a buy versus build perspective. Cyber is clearly an important part of ESG. It's an important part of what Cisco is doing going forward. Can you help us marry the two? What I mean by that is when you look at -- when Cisco looks at acquisitions or M&A, is ESG a consideration in that process? That's my first question.

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Great. No, that's helpful. And then maybe, just to tie it all together, some of the questions, and I'm going to try to pull a bunch of questions together here, is when you look at the success that you've had from an ESG perspective, when you look across the technology landscape, whether it's competitors, potential targets for acquisitions, how is your success in ESG played in the marketplace? And what -- I guess, what the question, I guess, is boiling down is, from a competitive perspective, has it led to better relationships and/or customer wins? Does it put you in the driver's seat in your view in terms of acquisitions that may be a strategic fit? Are you seeing more and more of your partners, whether it's customers, potential acquisitions, however you want to define partners, increasingly care more about what you're doing with ESG and view it as a source of advantage for Cisco? Mary de Wysocki Yes. Thank you. I would say it's one of the top focus areas and questions we receive, whether it's from employees who are seeking to work with Cisco, or our partners or our customers. They are asking those questions, our point of view on various ES&G topics. What have we committed to; importantly? How are we measuring progress against those commitments. ? So I do see it as a critical decision factor of whether an employee chooses to work with Cisco or a partner or a customer who also see ES&G as critical to their company strategy. We're finding more customers wanting to partner with us on how do we really advance some of the more thorny topics, where we can pilot and then really engage in learning to really identify where, for example, circularity is working. Where do we need to invest more innovation and to really push the envelope to understand how we create that entry, that world where everyone can thrive. It's very inclusive that we have secured the planet. All of that is now part of most of our conversations with our customers. So I do think you're going to see some really exciting partnerships in the future as we've done in the past. I think what is unique about Cisco is having really focus in this space. I think our first report, our first CSR report was right back in 2005, and that's when we -- actually, we're already REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 10, 2022 / 4:00PM, CSCO.OQ - Cisco Systems Inc and UBS to Host ESG Conference Call/Webcast reporting on our supply chain as well as our energy efficiency. And then I think taking a really planful approach of what can we achieve in the next 5 years. What is our ambition? How do we measure it. I think that gives the confidence that not only are we going to be audacious in terms of driving this digital and green transformation, but we want it to be very inclusive. And we're also going to be transparent in what works and what isn't, because those successes, though important, sometimes it's the learning of where we strive to make a dramatic change, maybe fell short that I think helps all of us learn and therefore, collectively reap some of the critical elements, whether it is net zero by 2050 or where we can have a world where we don't need social justice initiatives going forward.

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Great. Thank you for that summary. We appreciate that. So I think we'll just end it there. And so on behalf of my colleagues, Shneur and Julie, we thank you again for your time. And Emily, thank you for helping arrange this as well. And so if anyone has any follow-up questions, please feel free to reach out to us at UBS. We can point you in the right direction at Cisco. So again, Mary, thank you again for your time. This has been incredibly informative. And good luck on your initiatives, and we will speak soon. Mary de Wysocki Yes.