Earnings Call: Q4 2019

Jan 24, 2020

Welcome to Ericsson's Analyst and Media Conference Call for their 4th Quarter Reports. Erixson.com/investors. As a reminder, replay will be available 1 hour after today's conference. Peter Nyquist will now open the call. Thank you, operator, and hello, everyone, and welcome to today's call, the Q4 call. With me here today, I have our CEO, Borje Ekholm and our CFO, Karl Melander. So this short statement first. During the call today, we will be making forward looking statements. These statements are based on current expectation, certain planning assumptions, which are subject to risks and uncertainties. The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference. We encourage you all to read about these risks and uncertainties in our earnings report as well as in our annual report. With that said, I would like to hand over the call to CEO, Borje Komp. So please, Borje? Thanks, Peter. Welcome, and thank you for joining us for this report for the Q4. And again, Q4 marks another quarter of execution on the focused strategy building on technology leadership, cost leadership, product led solutions and global skill and scale. And we continue here to benefit from our strength and competitiveness as we grow faster than the market with maintained strong gross margin. Our underlying business fundamentals remain strong, and we feel we have a very solid competitive position. Top line grew organically during 2019 with 4% and 1% during Q4. We are in the beginning of a technology shift and our investment to lead in 5 gs is now starting to yield results. Today, we have 79 contracts and 24 live 5 gs networks. And we see that we now win new contracts based on our leading technology. The rollout of 5 gs continues in North America with good underlying growth. However, the uncertainty related to the announced merger has reduced sales in one account during the Q4. However, the decline in North America was compensated by good demand in Northeast Asia and the Middle East. We maintained a solid gross margin at 37.1 percent overall and 41.1% in Networks. The sequential reduction in gross margin in Networks were fully attributable to the Katharine business that we acquired during the quarter. When we win new footprint, the overall margin in those contracts are positive and contributes to our long term margin targets, but the initial margin is challenged. However, we also see during this last quarter that the initial low margins have been fully compensated by operating leverage, showing the strength of our underlying business. As I said, the acquisition of Catrain closed during the quarter. This is a very important acquisition for us as it will allow us to strengthen our antenna capabilities and improve our ability to supply integrated site solutions. We're now working on integrating Katrain into Ericsson and thereby establishing and building a leading portfolio of antenna solutions. But the contribution during the Q4 was a negative on our operating margin. So if we look for the operating margin, excluding restructuring and defined to the U. S. Authorities, it was 9.7% for the full 2019, actually putting us very close to the target for 2020, 1 year early. In the Q4, it was impacted by a couple of decisions we took. One is clearly the Catriona acquisition that raised OpEx, but that we see will pay off over time through strength and competitiveness in the antenna space. The other area where you see very discrete increases and it's in OpEx is for digital transformation. And that's critical investment for us to digitalize the internal ways of working and the way we interact with customers, fully in line with our focused strategy. We take these investments to take the next step in automating our processes, and we will see them gradually pay off during 2020 and into the future through better cost efficiencies. So that is clearly an investment program that, of course, have bumped up OpEx in the short term. But it should help lower longer term OpEx. The other area that we're The underlying business continues to be strong in networks, and that's impacting also the OpEx short term. The underlying business continues to be strong in networks and the gross margin, as I said, was a solid 41.1% during the quarter. The operating margin was sequentially reduced to 14.5% during Q4, and that's due to the Katren acquisition as well as Networks' share of the higher investment I just went through. For the full year, however, we are at 16% operating margin, which is in the range, and we're also very comfortable with the outlook. Digital services, we continue to execute on the turnaround plan. And this past quarter, they reached a positive operating income despite actually provisions of about SEK 300,000,000 for critical projects. And you know we have now resolved 3 quarter of the SEK 45 initially identified critical projects. The next item, free cash flow before M and A, was SEK 7,600,000,000 for the year. That's after the payment of the fine to SEC DOJ. And if we were to look at cash flow before the fine, the free cash flow was the highest since 2010, showing the underlying strength of the business. And the Board proposes a dividend of SEK 1.50 per share, and that is to confirm the confidence in our strategy and ability to execute and reach the target set for 2020 as well as 2022. So with short comments on the market for during the Q4, We can see that overall, the market in North America was very strong, except in the accounts affected by the uncertainty of the announced merger. And therefore, the sales overall shrank, FX adjusted. Europe was flat after growth in networks was offset by contract exits. Latin America declined as large contracts were finished in 2018. Southeast Asia, Sune and India grew based on strong demand for 4 gs. Northeast Asia grew following strong 4 gs and I will say 5 gs deliveries to prepare the network for 5 gs. And here, we suffered also from digital services that fell due to lower sales of legacy products. Middle East and Africa grew, driven by growth in the Middle East. If you look for the full year, we saw that North America was very strong, of course, driven by the initial demand for 5 gs. We saw also Northeast Asia be very good. Europe fell due to contract exits for Europe and Latin America. And here, Latin America fell due to timing of large projects. Southeast Asia, Oceania and India fell slightly, and this is explained by decline of legacy products in India within digital services. Middle East, Africa was flat. With that, I'm going to give the word over to Karl. Thank you, Borje, and good morning, good afternoon to everyone. Thanks for taking the time. Let's look at the full year performance to start with then, where we reached $227,200,000,000 in net sales, and this corresponds to 4% organic growth. Gross margin at 30 7.5% is within the 2020 target range already. And the operating margin here at 5% was, of course, including the SEC DoJ settlement. But if we exclude that, the operating margin was 9.7%, which is also close to the 2020 target, as Gurje said. The full year operating income number, dollars 22,100,000,000 again, adding having added back the FSC DOJ settlement cost, and that's more than double the profit of 2018. Net income, positive number, improved to $1,800,000,000 driven by the higher operating income, of course, but also lower financial net. And earnings per share diluted here came out at SEK0.67. Free cash flow, again, SEK7,600,000,000 for the full year. And also here that if adjusted for SSE DoJ payment, we delivered $17,800,000,000 free cash flow before M and A, which is 4x higher than that of 2018. Zooming in on the 4th quarter. Net sales, 66.4%, up organically year over year. And here, the operating margin, 9.7 percent, was impacted by a couple of items. We made a partial release of the SEC and DOJ provision. I'll come back to that, SEK 700,000,000 There's also a noncash element coming from the wind of the legal structure of a former joint venture we had ST Ares on, which is included here in the cost with a negative SEK 300,000,000. But yes, we can exclude for that. And then the operating income is SEK 6,000,000,000 and operating margin, thereby 9%. Also, you see net income improved here to $4,500,000,000 from a negative minus $6,500,000 last year. Finally, then free cash flow before M and A in the quarter was a negative minus $1,900,000,000 But of course, obviously, in that amount, we have absorbed the SEK10,100,000,000 payments to SEC and DOJ. But let me guide you through how the SEC and DOJ settlements have affected the accounting. This is a bit of technicality, but could be good to know. So the settlement was fully covered by the provision we took in the 3rd quarter. We paid out the $10,100,000,000 now during December, and that obviously reduced the provision with the same amount. But then the interest component of the settlement came out lower than we had estimated when we made the provision. And this means that we could default further SEK 700,000,000 of the provision, and that then again had an impact on the P and L now in the Q4 positively. So now we still remain with SEK 600,000,000 of provision for this purpose, and that will then cover future monitoring costs in this collection. That's a quick set of segment performance, starting with the largest segment, Networks. We see organic growth year over year of 2%. Sequentially, we grew Networks by 13%, but that's a bit lower than the historical seasonality, which is typically 18%. As Borje described, this was really affected by or impacted by the uncertainty in the U. S. With 1 account coming in a bit lower. But the underlying business fundamentals in North America remain strong. I think that deserves repeating. So also encouraging to see then that while North America was somewhat weaker, several other markets stepped up and compensated here. And we saw particularly strong market growth in Japan and Saudi Arabia, for example, as they prepare to launch 5 gs. So gross margin in Networks stayed above 41%, solid, but with a certain decline then quarter over quarter. I'll come back to that shortly. Operating margin, 14.5% was down year over year and quarter over quarter. And in a minute, I'll go through a bit more of the key items behind that development. But for the full year, as you see in the graph, Networks delivered an operating margin of 16%, excluding restructuring, and this is right in the middle of the 2020 targets of between 'sixteen and 'seventeen. 5 gs leadership momentum continues. We have now 78 or even 79, I believe, commercial 5 gs agreements in check-in this morning and 24 live 5 gs networks. So that's going well as well. And here we have earlier talked about strategic contracts. So we wanted to update you all on that as well and the rationale for those contracts. And as you know now in essence, these are selected few contracts that allow us to capture opportunities in the market to advance our position and coming often typically with lower initial margins, quite positive and value creating, of course, overall. And several quarters in a row, we have shown the impact of these contracts now. And what we do there is we net the impact of the contracts against what we call operational leverage, so other offsetting profit improvement measures. So essentially, we look at the sequential gross margin development. And in Q4, as you can see here, the net effect was 0 of strategic contracts and operational leverage. And the whole effect sequentially is explained by Katharine, as Berri mentioned before. Katharine obviously is going to gradually improve over 2020, and that's worth adding as well. So digging a bit further into Networks, I wanted to show this graph as well. So again, full year performance, very solid with a 16% operating margin. And also, Q4 gross margin can be deemed solid at 41.1%. But here, I wanted to show a bit more on how operating margin has developed over the year. I think this is relevant to understand the bigger picture here. And as you see, the year to date operating margin has been rather stable at around 16% with some fluctuations between quarters. And Q3 was, of course, a very strong quarter for Networks with 18.4% isolated operating margin. And you also can see in the graph how this was supported by a low OpEx ratio. While in Q4, OpEx came back to a bit higher levels, but fairly in line with previous quarters also. And that, of course, is visible then in the operating margin. So what we should consider here, and you see the bullets to the right. One, CATVIN, about $500,000,000 of impact. That's 1 percentage point or so. And we have the investments that we have decided to make in digitalizing the enterprise but also compliance and security. But then we also have customer revaluation and some impairment of accounts receivable. And that's an effect of SEK 300,000,000 in the quarter. Actually, that was a positive number in the 3rd quarter. We're obviously investing also in R and D. So if you look year over year, we've added also some $900,000,000 or so in R and D. And lastly, the lower seasonality on top line also shines through here. Again, the full year performance in Networks, strong. Digital Services. I think the main news item here is that the result was positive in the quarter, but you mentioned it already. It's actually $42,000,000 Although we use SEK 1,000,000,000 here with 1 decimal, it looks like it's 0.0. It's actually $42,000,000 positive. So I think that's a great testament to the turnaround efforts in digital services. We see good momentum in the portfolio, customers migrating to 5 gs. And sales were good here in OSAS and cloud infrastructure, Northeast. There was some decline of organic sales due to core sales in Northeast Asia coming down somewhat. But gross margin stable 38.1%. And I see what we see now is the continued impact from cost reductions and efficiency gains in digital services. And that continues. We're working on rationalizing the portfolio on the legacy side and reinvesting that part of it, at least, into the new 5 gs cloud native portfolio. Yes, 10 contracts remain after the critical ones. All the other ones have been handled now according to plan. And I just want to highlight here when we look forward that we, of course, are very committed to the target of low single digit operating margin for 2020, but it might not be a linear journey through the quarters here. It can vary between the quarters, of course, depending on sales mix and business mix, etcetera. Okay. Many services, and I'll speed up a little bit. Sales, SEK 7,000,000,000 in the quarter, relatively flat, which is just for FX, but with an improved gross margin year over year. This is fundamentally a stable business in Ericsson, but we can have some fluctuations in margin between the quarters due to the level of add on sales, for example, that we deliver to customers and the timing of costs. So cost margin declined a little bit because of that. But full year, you should look at the full year here, I think 6.3% operating margin, and this is even excluding positive one off we had in the Q1 then. And even this number is fully in line with the 2020 target for profitability. Okay. Emerging Business and Other. We had some extraordinary items, and we have described them before. It's the provision release and the F. D. Ericsson legal wind down. But if we exclude those special items, we see that this segment has improved its performance in 2019. We see organic growth and reduced losses, both full year and in the Q4. So we should bear in mind also when we look at organic growth, we have adjusted not only for FX but also for the 51% divestment of MediaKind. We talked about strong momentum in the Q3 and in the investor update. This continues. So sales growth in IoT, almost twice the market growth, and now we have more than 5,000 enterprises on the IoT platform. So this is going well and right in line with our strategy. Finally, we have Iconnective. That's our software based number portability solution that also continues to deliver profitable growth in both the Q4 and the full year. OpEx, R and D and SG and A here. In R and D, obviously, we continue to focus investments, 5 gs, cloud native, AI. And you see how R and D has shifted here between the segments. Well, we're investing in managed services reducing the other 2 segments. In SG and A in the middle, you see here the one off item of 0.2 when it comes to customer financing and then the 0.4 which is around the corporate projects for the items that we have talked about earlier here. Of course, there is also a negative FX element on both R and D and SG and A worth to keep in mind. On the right side, you can look at the graph here showing the yearly development of R and D and SG and A. You see that SG and A is down about SEK 1,000,000,000 per year. So obviously, lower absolute amount but also lower percentage of sales. And R and D, meanwhile, up in absolute money terms, which is part of our key part of our strategy, I would say, but stable or even down in percentage. So for 2020, we do expect some higher operating expenses than in 'nineteen, and this is driven by these investment areas, but also the fact that we have included the new Katrine business. Of course, the ambition at the same time that we have is to grow top line more than expenses. In other words, expenses as a percentage of sales should come down. Okay. Free cash flow, quickly. I think we've said most of it already, but coming in at 4 times better than 2018 if we adjust for FDC and DGA. We have had very strong focus on working capital efficiency again this year. I must say it has yielded a good result here, good cash collection, etcetera. And working capital there is now down to 75 days, which is the lowest I can remember. We ended the year with $34,500,000,000 in net cash and more than SEK 72,000,000,000. So that's supporting one of the fundamentals here in the strategy to provide resilience for our company. Okay. So then to our planning assumptions here, and I really want to refer you, as usual, to the full report. But to mention very few ones here. Del Oro, which we listen to when it comes to the run market estimates, estimates that, that market will grow by 4% in 2020. And 2019, they have estimated, grew 5.5. So our networks business grew a bit faster than that in 2019. For sales in Q1, our average sales here is, when it comes to seasonality, is minus 25%. But it's worth considering that Q4 was impacted by the U. S. Uncertainty we talked about. So the base is lower, meaning that the seasonality effect into Q1 should be somewhat better, a lower negative percentage. IPR, we'll find a couple of new IPR contracts during the year. So the new base is SEK 10,000,000,000 if we look at the contract stock we have compared with the SEK 9,000,000,000 we have mentioned before. We also talked about Katharine quite a lot and its impact here. Obviously, gradually improving during the year, but still we expect loss that to be loss making for the full year. And then OpEx, finally, typically, we see a decrease here in between the quarters, Q4 to Q1. Last two years, average decrease was SEK 2,300,000,000. But as we have said several times, we expect somewhat higher level than compared to 2019 this year. So that is it from me. Thank you so much. And I hand back to you, Birje. Thanks, Karl. So closing, we launched our focused strategy in 2017 with the ambition to build the stronger Ericsson longer term. The first ambition was, of course, to turn around the company and return to growth. And we can now see that the increased investments D is paying off. We established ourselves as a leader in 5 gs with 79 commercial contracts and 24 live networks across 4 continents. We continue our ambition is to grow faster than the market, and we believe we continue to see a faster growth. And we're winning contracts here based on technology merits, which has allowed us to maintain a solid gross margin. During the quarter, we've been able to reach an agreement with the DOJ and SEC. And with this agreement, it allows us to move forward building Ericsson with a focus for the long term. So we continue to increase our investment to ensure that we have a compliance program that is fit for purpose. And we are fully committed to our 0 tolerance policy and building a compliance program that's world class. So it includes work on changing our culture, updating processes, improving third party management, vetting of senior executives, etcetera. The Board proposes to increase dividend to $1.50 per share, reflecting a strong confidence in our strategy and ability to deliver on our financial targets. So we will keep focusing on building a stronger company longer term. We will never trade off the long term perspective for a short term gain. Having said that, we are comfortably tracking towards our financial targets for 2020 2022. Thank you. Thank you, Borje. So by that, we are now ready for the Q and A. So operator, I invite you to open that session, please. Thank you. Ladies and gentlemen, at this time, we will begin the question and answer As always, please limit yourself to one question at a time and please keep your questions at a broad level. Detailed information is provided in the reports and Ericsson's Investor Relations and Media Relations teams will be happy to take additional questions and discuss further details with you after the call. Our first question comes from the line of Edward Snyder at Charter Equity Research. Please go ahead. Your line is open. Good morning, Ed. Good morning. Good morning. I had a question about the U. S. Markets just regarding the Timo Sprint merger, which I would expect should be decided within the next month or so. If that should be if they should get approval for the merger, how do you see that impacting CapEx spending? I know it's been kind of put on hold, but if it does get approved, they're going to change plans on how they're going to deploy especially 5 gs and Band 41, etcetera. So one, how long do you think it will take to return to a more normal CapEx profile for that firm? And 2, what happens with the margin profile of your business in North America when we start seeing more aggressive build outs in the, I'll call it, sub-six for lack of better word. But AT and T has been talking about deploying on FirstNet and then T Mobile would go on BAT-forty one. But if that becomes a reality and we start seeing 5 gs equipment actually in bands deployed in the infrastructure, what does that do to the margin profile? As we said, the merger, the announced merger has impacted Q4 clearly. But I would also say that the what drives CapEx need in this industry, it's really a couple of things. One is, of course, the technology shift from 4 gs to 5 gs, when we're in the beginning of that. The second one is the data growth. So the underlying need to invest in capacity hasn't really changed. So we don't really see short term that it's more important that the outcome is resolved. And whichever way it goes, we believe that reduced uncertainty will actually lead to spending because there is a need to do that. But of course, the investments will vary depending on the outcome. So that's why it's very hard to speculate about. So let's see where that brings us. If you look at the margin profile, we have and we talked about this for quite some time, we have tried to make Ericsson less exposed to our geographic mix and mix between markets and mix between technologies in that sense and business segments. And I think when you look at the Q4, you see an unusually low North American share, and we still have sequentially a strong gross margin. So I think it indicates that we have a much less geographic mix or business mix exposure than we've ever had in the past. So that's what we are going to continue to work on because a resilient company has less of those, I don't know, variability depending on mix. Okay. You're happy with that, Ed? Yes. Thank you very much. Thank you. So we're open for the next question. And that comes from the line of Achal Sultania of Credit Suisse. Please go ahead. Your line is open. Good morning, Achal. Hi. Good morning, Peter. Good morning, everyone. Just a couple of questions. First on the Kathrin, obviously, you're losing a lot of money right now, dollars 200,000,000 gross profit loss, dollars 500,000,000 EBIT loss in Q4. Just trying to understand what's the path and the timing of trying to get this business back to profitable levels? Is it about more about the new product launch? Is it about trying to launch those new products with the antenna systems as we go into 5 gs? Can we actually expect that business to be breakeven by the end of this year? And then secondly, on the OpEx side, can you help us understand when you talk about slight increase in 2020, what is the right OpEx base we should use for 2019 because there have been a number of moving parts one off items in 2019. So just trying to get a sense of what are the puts and takes for 2020 OpEx. Thank you. Yes. If we start with Katharine, I'll leave Karl to comment on the OpEx. But with Katharine, it is it's a couple of effects we've had during the Q4. So when we took over the or we took over the business, we didn't have the permits to operate in the factory. So we had actually stopped supply in the beginning of the quarter. And that's what you see the effect of that you see in gross margin. And we will always ensure the safety of our of the people working for us. So for us, we did not want to operate the facility without fire permit. So that's one effect we had in Q4. Then so but that you just keep that in mind. We also see that Katharine was impacted by the uncertainty in the U. S. As well. So when you you should put that aside and say that was what we saw in gross margin. When we now move into 2020, we expect to have a loss for the full year. And we do that because we are investing in building a strong road map within Antenna and within a bigger product offering. So you will see us gradually improve through the year, but the year will overall clearly be negative. But we're establishing a very strong competitive position and competitive offering in antenna solutions. It's probably going to take 12, 18 months before we're there, but that's the plan we're working according. And we think this is going to be even more important in the 5 gs world when we can offer fully integrated site solutions. On the OpEx? On the OpEx, yes. Achal can take that then. So I mean, as you know, we don't guide on OpEx typically, but we have said now that if you start with the baseline for 2019, it's about SEK 64,000,000,000 or so. We are saying that we will increase that a bit. And of course, the ambition here is to grow the top line more, as I said, in order to decrease the percentage of OpEx to net sales. But some of the moving parts that you asked about, I mean, we do have CAT line, obviously, brought in, and both SG and A and R and D comes from there. And then we have the 3 areas that we talk about here: digitalization, which will yield return, longer term, of course, in a more efficient enterprise but also compliance and security. So I would say, I mean, we obviously, we work with constant efficiency measures as well to be as efficient as possible in the SG and A side. In R and D, it's also about improving productivity, not necessarily decreasing the amount of investment there because I think definitely we have proven that the investments in R and D have yielded result in strongly improved gross margin and competitiveness. So we will manage it in a good way all within the 2020 targets. Okay. Thank you, Karl. Achal, are you happy with that? Yes. Thank you, Peter. Thank you, Achal. We're open for next question, please, operator. Thank you. The next question comes from the line of Daniel Jarabei of Handelsbanken. Please go ahead. Your line is open. Good morning, Daniel. Good morning and thank you for taking my question. First, congratulations to strong cash conversion here in the quarter and also on the improvement in digital services. Just a short follow-up on Kathrein. Should we expect, given what you stated, the 3% just that H1 will be slightly better? Or will it get even a bit worse and getting better in second half? That was the first question. Yes, we should. This is a gradual process. So what we've seen during Q4 is this loss of production, but also investments in the product portfolio. Investments in the product portfolio will clearly continue. So the ambition is to get back more to normal production. We think we're going to focus the Probat portfolio and invest for the future, and that's going to carry some costs throughout the year with a bigger loss first part of the year than the second part. So we should see you can probably assume a similar to Q4, give or take. Perfect. May I also just ask you about China and the 5 gs procurements. You commented about the initial launches of 5 gs impacting growth in the area. Can you say anything about what you'd expect for the 2020 uptick? And also if you have seen anything on the market share so far, it would be great. We have the procurement in China has not been concluded. So we have and we don't know when it will be. So it's a bit hard to speculate. But what I can say is we have our ambition is to strengthen our position in 5 gs than 4 gs. And that ambition, we have and we're going to continue to focus on delivering on that. Perfect. And just Okay, thank you. I will come back in line. Thank you. Okay. Operator, let's move to the next question. Thank you. The next question comes from the line of Amit Harshandani of Citigroup. Please go ahead. Your line is open. Good morning, everyone. Amit Chandani from Citi. Good morning, Peter. Thanks for letting me on. My question really goes back to the resilience of the networks gross margin that we saw in Q4, which is, I guess, particularly noteworthy given the lower contribution You've talked about at least you've referenced Del Oro talking about the market growing 4%, so there should be some leverage coming through for you on the top line. Is it a fair assumption to make that you will be able to manage the impact of strategic contracts and given their growth in the RAN market, your gross margin for networks should at least be flattish year on year in 2020? Or put it other way, how would you advise us to think in terms of gross margin evolution for Networks over the course of 2020? Sure. Thank you. But I think what we have shown now during Q4 also is that we are able to compensate for strategic contracts with other operational leverage. We don't expect that to dramatically change. Of course, we are fully committed to the targets that we have set up, including the bottom line of 15% to 70%, and we will deliver on that. There are puts and takes here with strategic contracts in China, but we're also working on improving, obviously, the underlying operation in networks. So I would say on Yes. And I would say what we do now is we're also working on changing the way we work in the company and improving our ways of working through digitalizing the company more than in the past. That should the whole ambition with those investments is actually that it should lead to efficiency gains and lower cost levels in the future. So we're taking some costs during Q4 in order to deliver those benefits 2021 and beyond. So when you look at 2020, you can, I know, as Karl described, I think it's a good way to think about it? But longer term, we should see a lower ratio of OpEx to sales and a strong gross margin. And I've said it before, gross margin is the best indication of a competitive product portfolio. So that's why we it's a very important metric for us to follow. So of course, we're happy to see that we can reduce some of the geographic mix and, in addition, see a good gross margin despite taking some contracts with a challenged short term margin in there, but they will contribute to 2022 and beyond. So we feel very comfortable about for the 2022. Okay. You're good with that, Amit? Thank you, Peter. Thank you, gentlemen. Thank you. Thank you, Amit. Thank you. So we'll continue with next question, please. The next question comes from the line of Johanna Alquist of SEB. Please go ahead. Your line is open. Good morning, Johanna. Good morning. Thank you for taking my question. Maybe 2, if I may. The first one relates to OpEx again. I'm just trying you mentioned that the base is 64%. And I'm just trying to understand the magnitude of the OpEx increase because you have some one offs in 2019. And just sort of putting back those one offs would imply an increase of at least EUR 1,000,000,000 and then adding more costs for Katharine to that would get us to €2,000,000,000 higher OpEx. So I'm just wondering, are you really expecting an underlying increase in OpEx? Or are these of the one off effects not be there anymore and the addition of Catrien? Or how should we think about it just to get the magnitude? That's the first question. And if I may, I have another one. Sure. Okay, Rui. But I would say, I mean, we're also doing efficiencies, of course, to deliver what I said before. There will be an increase in absolute number. But and of course, there are one offs included, fully aware of that, in the 2019. And there will always be one offs, but that's not really what we see on, of course. So there essentially, there will be a certain increase because of the investments and because of Katharine. But again, thanks to the efficiency measures we are taking, we are aiming to reduce the percentage of net sales. And yes, that's what I can say. Okay. And my second question, if I may, was just on gross margin again because are you given the fact that you expect a higher OpEx level for 2020, I guess you need to feel pretty confident in the fact that you can keep the gross margin on fairly the same levels at 2019 for the group. So I'm just wondering how big negative impact do you expect or incorporate from China? Is it a negative initial gross margin? Or is it just a low initial gross margin? Because I guess that will have an important driver in either way. Johanna, it's a great question. We cannot it's very hard to comment on China yet because we don't really know know what market share we will get, what prices will be. So we'll have to come back on that. Of course, we've factored in costs. When we guide for 2020, we have made certain assumptions that include costs to that affect gross margin negatively, but still reaching guidance. But depending on what the outcome will be, we cannot comment. So a realistic case, based on increasing our market share in China, we'll have a negative effect on gross margin. We factor that into the guidance for 2020. Perfect. That's clear. Thank you. Thank you, Anna. And we'll move to the next question, please. And that comes from the line of Frederik Liefeld of Danske Bank. Bank. Thank you. Good morning. Thank you for taking my question. Many questions have been answered. But on the cash flow generation, you have improved many of your metrics, worked well with the working capital metrics in the year of 2019. Are there still a lot to do for you there? Or do you see that you have sort of reached a level where it's difficult to squeeze any additional out of those if we sort of take the operational size apart? I think we have made very big strides actually on working capital during this year. We continue with that definitely. And there is more to do. It's about the lead times in projects, contract delivery, so in terms and conditions and also the cash collection machinery, I would mention, which has been very effective during 2019, and that will certainly continue as well. So yes, the effort is 100% on to continue to deliver good capital efficiency. And of course, in a growth scenario, what we try to do is to still keep working capital bay, if you like, even during growth. But of course, that puts another challenge into the mix if the whole business is growing. Okay. And maybe a question for Burri then on China. Again, I know it's difficult to answer, but sort of when you think about this situation with the initial phase, which we have seen many times before with pressure on the margins when you roll out, what sort of time frame are you expecting that to be under? Is it going to be a year or 2? Or how do you sort of see that playing out? If you would say that it starts now, would it take a year or 2? How do you sort of think about that? Thank you. It's very hard to say in reality how long the rollout will be. But if you look at the if you think about 4 gs, it took a few years to build out a complete nationwide coverage. So you can probably assume that this is going to have something similar, but it's very hard to speculate. What we have done is we have based the case on the historic experience. And you've seen the way we said in 2017. I think it's the same thing now. We have factored something similar in. And then we'll have to see where it comes out. And we'll hope, of course, we can gain market share, but we will see. Okay. Thank you. Thank you, Fredrik. Please, next question. The next question comes from the line of Jurgen Vetterberg of Nordea. Please go ahead. Your line is open. Good morning, Jurgen. Good morning. Thank you, gentlemen, for letting me on. So a quick question on the digital services contracts. You're right that you have some pressure from continued impact from the BSS strategy. And we know that you had these major troubled contracts that you took provisions for last Q4 with 0% gross margin. When can we expect those to kind of go away? And how should we think about relief on gross margins from those in 2020? Thank you. Some of these contracts are actually very long. They're actually they're it's so even if we deliver and convert them into, call it, revenue generating contracts, there will be a margin drag for a long time. They are some of them are even 10 years. So these are going to have an impact quite a long period of time. Our ambition is still that we will see digital services be profitable this year, low single digit margins and then reach double digit margins in 2022. That is including a drag from those long tail contracts. So there is we've said this before, I think the execution in digital services has always been focused on establishing a competitive product portfolio longer term. And that's why we have said the improvement come gradually. And of course, that factors in the drag from some of the contracts, which will live there for another decade. So I think over the last few quarters, you've seen us systematically deliver on that, and that's something we will continue to do. Then I you can always hope for some of these contracts to generate additional sales, additional revenues as you have a footprint depending on how the customer scales their business, business, etcetera. And then the margin profile can change. But as of now, we're focused on delivering on the plan we've put in place. Okay. Thank you. Thank you, Jorgen. So let's move to the next question. And that is from the line of Stefan Slowinski of Exane BNP Paribas. Please go ahead. Your line is open. Good morning, Stefan. Good morning. Thanks for taking my question. I've just got 2 quick ones on cash. Maybe the first one for Carl. You had $18,000,000,000 of free cash in 2019, about 8% of revenues. Can you help us understand more of the outlook for 2020? We've got the restructuring guidance you've given, but should we expect any other significant changes in CapEx or working capital movements? Do you need to increase inventories, for example, to prepare for China? Anything else that we should expect to impact cash flow in 2020? As you know and we talk about this at the Investor Update, we have provided this illustrative bridge coming from a 12% operating margin, which is the 2022 target and down to 8% and describing and how the various components there between will impact. And I think we stick to that one. Now we were very successful, I would say, in 2019 in delivering a good cash flow. So we are on those parameters that we mentioned in that bridge, we over performed on several, not least on working capital. I think in that bridge, we put working capital as stable in absolute or in percentage, I should say, so it's sort of neutral on working capital. I think that's a decent ambition to have going forward. When it comes to CapEx, as you asked, I mean no major shifts. We are investing in the U. S. Production, for example. So that could be small variations there, but nothing major to mention. We have a very big focus on generating cash flow, and I think that's we see the result of that in 2019 now. So the whole organization is much more geared towards producing cash flow, and that includes working capital but also discipline in capital in general and in both allocation and spending on these various items. And we will continue to work on that. That whole area also, I should say, is supported by the incentive schemes that we have in the company. So that's also giving a lot of result actually where we have working capital. We have cash collection. We have economic profit, which is a value creation metric. And for most people with short or short long term incentives. So that certainly helps us well. It's a big focus area. Okay. Maybe just follow-up question. Yes, just a follow-up question maybe for Bordier on that, which is with the cash flow, I mean, you've got the SEC fine behind you, most of the major restructuring has been done, and you have this net cash position, it could be as high as DKK 50,000,000,000 by the end of this year, even after paying the dividend. So is there more you can do to optimize the balance sheet? And do you need to have DKK 50,000,000,000 of net cash? It's a better problem than the opposite that we had, I think, in 2017 when everyone told us we needed to raise equity. So the we will come back on this. I think it's important for us to have a strong financial position plans and they look on our ability to be a long term plans and they look on our ability to be a long term competitor, they look at our financial position. So it is important. Maybe we can do something on that. It's something we haven't looked at right now. We've been focused on making sure we get the business in much better shape, and then we can take the next step. So let's come back and discuss that at a later point. Understood. Thank you. Realizing that we have a long line of questions coming out, I would actually now we will take the last question. And again, for those on this line, you can always reach out to the IR team or the press team if they are journalists. But we will now take the last question for the call. So please, operator? Thank you. And that question is from the line of Peter Kurt Nielsen of ABG. Please go ahead. Your line is open. Thank you very much. If I can just return to the OpEx and the decision to invest in digitalization of business processes. I have I don't recall having heard you speak of this before. Obviously, one of your competitors has spoken of the need for similar investments. Could you perhaps discuss briefly what has driven your sort of decision to invest in this, the need, how long will this investment be? Is it a 1 year horizon? And is the impact, which Karl illustrated for Q4, I think, was minus €400,000,000 roughly sort of a good guide for what we should expect in the coming quarters? Thank you, Pascal. Yes. It's these are if you think about them, it's actually that we increase cost level short term that should result in lower cost level over time. That's what we do. That's the reason why we do it. And it includes a couple of different things. So it's a number of different projects. But we feel that we need to automate a lot about our own order processes, visibility of customer orders, the way we run projects, all of these should result in efficiency gains down the road, and that's what we invest for. But the reality is when we do these investments, we talk about them in the light of serving the customer in a better way. It's all about making sure that the customer gets the service, the customer gets the delivery on time, the quality on time, right the first time, etcetera. And why haven't we started doing it before? Well, we said that, first, let's get our basic processes in order before we automate them. And we felt during the year of 2019, we got the house in order and we got the business in shape. So we said we can, during the year of 2019, take the next step and see if we cannot get further efficiency gains and kind of improvements through digitalizing our business. That's why we took the decisions during Q4 or during Q3, Q4. Then going forward, you can probably expect a similar level as we had in Q4 and gradually see the improvements coming through towards the end of the year. Thank you, Peterko. Before handing over for the conclusion from Borje, some practical things. First of all, we have our event in Barcelona for the investor community and all the stores for customers on the 24th to 35th February. And you can find more information about on our website how to join that. Secondly, this time, we only have one call. We don't have an afternoon call. However, this call will be recorded and posted during the morning on our web, so you can listen in again on that. So by that, I would actually leave over to Borje to conclude this call, please. So thanks, Peter, and thank you, everyone, for joining. So we've with a focused strategy we put in place, we now have a very strong underlying business. We took some investments during Q4 that we will see yield result in the future. And we feel that we are comfortably on track to delivering on the targets we set for 202020 22. But that is only a first goal towards building a much stronger Ericsson longer term. So with that, thanks for joining us this morning. Thank you. Thank you. This now concludes our conference call. Thank you all very much for attending. You may now disconnect your lines.