Status Update

Dec 7, 2019

Slides

Thank you very much, and good morning, everyone, and welcome to this conference call following Ericsson's announcement that we have reached a settlement with the U. S. Department of Justice and the Securities Exchange Commission. This settlement marks the end of the FCPA related investigations into Ericsson. This morning, I have President and CEO, Borje Ekholm CFO, Karl Melander and our Chief Legal Officer, Xavier Dedalen, with me. And they will take you through a presentation. After these their remarks, we will have time for a few questions. We also encourage all of you to read our press release that has been published on erixson.com. During the call today, we will be making forward looking statements. These statements are based on our current expectations and 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 call. We encourage you to read about these risks and uncertainties in the press release and in our earnings reports as well as in our annual reports. With that, I would like to hand over to Mr. Borje Ekholm. Borje, please? Thank you, Mr. Ullaremb. Good morning, everyone. I would like to start by saying that today's settlement with the U. S. Authorities is an important step for us as a company that will enable us to move forward. But I would also want to make it clear that I view what has happened as completely unacceptable and hugely upsetting chapter in our history. In my career, I've learned that the culture of integrity, responsibility, transparency and accountability is what ultimately counts in determining a company's success. The way we conduct business at Ericsson is of great importance. Business is always about winning, but we must win based on merits following Ericsson's clear code of business ethics. Today's settlement reflects conduct by certain individuals who disregarded these fundamental concepts. The settlement with the SEC and DOJ shows that while the company had a compliance program and a supporting control framework, they were not adequately implemented. Specifically, certain employees in some markets, some of whom were executives in those markets, acted in bad faith and knowingly failed to implement sufficient controls. They were able to enter into transactions for illegitimate purposes and together with people under their influence, use sophisticated schemes in order to hide their wrongdoings. As the conduct happened over several regions and a fairly long period of time, we need to address our culture in addition to the compliance program. The events described in the settlement show the importance of fact based decision making and the culture that supports speaking up and confronting issues. While we can't change what happened in the past, we have learned from this process and have implemented significant continuous and lasting improvements. Ericsson today is already a stronger company with a much more comprehensive ethics and compliance program. However, this work must never stop. We can do nothing about yesterday, very little about today, but we can change tomorrow. This settlement puts an end to a long and wide ranging process. And while the events described in the sentiment are totally unacceptable, I'm actually glad that we finally reached this stage. We're now able to move forward and fully focus on our business and build a stronger company, supporting our customers in their journey into the 5 gs era. With that, I would now like to leave the word to Mr. Karl Melander, our Chief Financial Officer, who will walk you through the financial implications of the settlement. Thank you, Borje. Yes, let me walk you through the financial impact. The settlement amount consists of a fine to DOJ and a financial sanction plus prejudgment interest to SEC, which combined amount to USD 979,000,000 and an interest component of USD 81,500,000 The settlement amount is fully covered by the provision we made in the Q3, and that was recorded as other operating expenses under the segment, emerging business and other. We will pay the fine, the financial sanction and the interest in December now with an impact on our Q4 cash flow of SEK 10,100,000,000, which is the equivalent SEK 12,000,000 amount. The payment will reduce the SEK 11,500,000,000 provision we made in the 3rd quarter. Part of the remaining provision relates to the cost for the compliance monitor, which will be paid out over the 3 year monitor period. And since the final pre judgment interest amount is lower than we had earlier anticipated, a portion of the provision will also be released. While the amount for the settlement today is significant, I can confirm that we will be able to manage the associated cash outflow with available funds. You will recall the balance sheet position we reported in our recent Q3 earnings report, including gross cash of SEK 76,200,000,000 and the net cash position of SEK 37,400,000,000 Our capital structure strategy and funding plans will remain intact. And as regards debt funding for general corporate purposes, we intend to continue the current plans to refinance upcoming maturities in due course given market conditions. In the Q3 report, we generated free cash flow before M and A of SEK 5,500,000,000 which is SEK 4,800,000,000 higher than in the Q3 2018. Year to date, we reported free cash flow before M and A at SEK 11,800,000,000 which was an improvement of SEK 10,500,000,000 compared to the same period in 2018. And as you will recall, within these numbers, we have absorbed payouts for restructuring and provisions of a total of $8,700,000,000 during the first 3 quarters of 2019. We continue our strong focus on generating positive free cash flow and our prudent approach to investment and cost, which includes targeting profitable growth in a selective and disciplined fashion. And we remain committed to our financial targets for 20 2020 2022, and nothing in today's announcement changes this. Our targets are, as you're aware, to reach an operating margin of more than 10% in 2020 and between 12% 14% in 2022 with all segments improving from today's level. And with that, I hand over to Xavier DeDalen, our Chief Legal Officer. Thank you, Karl, and good morning, everyone. I would like to start by giving you some context on the settlement. The resolution relates to historical FCPA breaches ending in Q1 2017. And while the DOJ and SEC conducted separate investigations, the same facts have been shared with both authorities. It's important to note that there are important differences between the SEC and the DOJ processes. The DOJ proceeding is a criminal enforcement action and the SEC proceeding is a civil enforcement action. The agencies resolve their investigation independently of one another using their own discretion and applying different standards of proof. As a result, the DOJ and SEC have come to different conclusions based on the same facts. The settlement relates to violations of the accounting provisions and the anti bribery provisions of the FCPA. The anti bribery provisions prohibits the offer, payment or promise to pay anything of value to a foreign official to obtain or retain business. The accounting provisions, on the other hand, require issuers to maintain accurate and detailed books and records and to maintain an internal control system to ensure accuracy of those books and records. Now looking at the settlement with the DOJ, there are a few points we would like to highlight. Ericsson has entered into a 3 year deferred prosecution agreement, or DPA, with the DOJ to resolve criminal charges related to violations of the bribery provisions of the FCPA in GBOTI. The agreement also resolves violations of the accounting provisions of the FCPA in China, Djibouti, Indonesia, Kuwait and Vietnam. In the agreement, the DOJ agrees to defer the prosecution of those charges and to have them dismissed at the end of the term in exchange for Ericsson complying with the conditions of the DPA. Those conditions include the payment by Ericsson of a fine of approximately $520,000,000 In addition, the DPO has no obligations on the company an obligation to continue to cooperate with the DOJ and other domestic enforcement and regulatory authorities in any investigation of related matters and an obligation to continue to self report any allegations of violations of the anti bribery or accounting provisions of the FCPA. Also as part of the resolution of the DOJ, Ericsson's Egyptian subsidiary entered into a guilty plea to bribery in Djibouti. Separately, Ericsson settled the FCPA investigation by the SEC. We did this by agreeing to the entry of a judgment. In its complaint, the SEC alleged that Ericsson violated the accounting provisions of the FCPA in China, Djibouti, Indonesia, Kuwait, Saudi Arabia and Vietnam. It also contains an allegation of bribery in Djibouti, China and Saudi Arabia. Under the terms of the resolution, Ericsson will pay a financial sanction of approximately US408 million dollars plus pre judgment interest of approximately $81,500,000 and it is also enjoined from violating the provisions of the FCPA in the future. Pursuant to the resolution with both agencies, Ericsson has also agreed to retain an independent compliance monitor for 3 years. The monitor will review our compliance with the terms of the settlement, make recommendations and report to the U. S. Authorities on our progress in strengthening our ethics and compliance program. Let me now briefly describe the type of misconduct that was identified. While the company has had a compliance program and a supporting control framework, they were not adequately implemented. Specifically, certain employees in some markets, some of whom were executives in those markets, acted in bad faith and knowingly failed to implement sufficient controls. They were able to enter into transactions for illegitimate and together with people under their interest, they entered into sham contracts or contracts at inflated prices, including the creation of cash pools outside of the company's control, where the ultimate beneficiaries of those funds were unknown. And they arranged for excessive travel and entertainment of customer representatives without a demonstrable business purpose. As the investigations progressed, the Board became aware of the extent and seriousness of the misconduct. They appointed an independent external advisor in 2016 to review the compliance program and formulate the access remediation plan to strengthen the program, which the company has been implementing ever since. I would also like to make it clear that the key individuals as identified in the DOJ's statement of facts, which should be released shortly, are no longer with the company. In fact, in total, 49 people who were involved in the wrongdoing have left the company. Let me now talk a little bit about Ericsson Ethics and Compliance Program. We have put a great deal of emphasis on fostering a culture where speaking up and integrity are cornerstones in how we conduct business. Since December 2016, Ericsson has worked with a leading independent compliance advisory firm to assess and improve our Ericsson compliance program. This has resulted in significant improvements, which I will talk about in a moment. We are of an effective compliance program. To the right of the slide, those components, and they include leadership and culture, policies and procedures, periodic risk assessments, the compliance organization, training and guidance, allegations and investigations, reward and sanctioning, 3rd party management, M and A due diligence and integration and monitoring and testing. Let me walk you through some of the key focus areas today. 1st, the compliance resources. We significantly increased the number and quality of resources devoted to compliance investigation activities. This includes not only full time professionals in the compliance and investigation functions, but also full time employees from finance and sourcing dedicated to the organization's anti corruption compliance efforts. Secondly, leadership. As we have seen, it is essential that the company has confidence in all its people, particularly those in senior roles. We have introduced an enhanced compliance vetting process of our executive team members and other staff in over 150 key positions. 3rd, 3rd parties. The findings of the investigations also show that the use of third parties was critical in the ability of the wrongdoers to engage in the misconduct and hide their misconduct. That is why we have focused on strengthening our 3rd party management process not only at the time of hiring but also over the course of our contract periods to manage them and monitor them. 4th, use of data analytics. We are supporting the compliance program with improved data analytics running over our finance systems to screen and help detect unusual patterns and suspect transactions, including travel and entertainment. This is by a team of dedicated finance compliance professionals. 5th, the allegations management process. We reorganized our allegations management. We introduced a centralized and systematic process, which is the end to end handling of reported allegations of violations of our Code of Business Ethics. It covers the entire process from intake to investigation to remediation. And this approach supports the credibility of our compliance program, but it also makes sure that we learn from past violations to better prevent future violations. There are, of course, many more improvement initiatives, but I hope that what I shared with you today gives you an idea of what we're doing and, more importantly, that it gives you a sense of our genuine commitment to build a robust and fit for purpose compliance program, one that is truly befitting of a company like Ericsson. And with this, I leave the last word to our CEO, Barry Eckholm. Thank you, Xavier. While it is important that today we've reached a settlement that ends all current FCPA investigations into Ericsson, It's critical that as a company, we continue to learn and improve from this process. I would like to reiterate that we have an absolute zero tolerance for corruption and continue to take swift action against any type of behavior found to be in violation of our robust code of business ethics. And we have already implemented continuous and lasting improvements to our compliance program. However, this is a job that never stops. Continuous improvement and innovation are paramount, and we will remain relentless in our work towards improving and safeguarding a strong compliance culture throughout the company, where frank and fact based discussions are not only accepted, but expected. Ericsson is today already a stronger company with a stronger speak up culture that together makes us better equipped to deal with compliance challenges in a consistent way. We will work tirelessly to ensure that we can retain and deserve the trust of our employees, customers and the societies where we're present. We will continue to invest and to implement the best methods and systems available. We will continue to test, evaluate and refine our compliance systems with the aim of always having the best available tools. To make the improvements ingrained in the organization, we will continue to focus on our people. We owe it to ourselves and each other to stay vigilant when tackling these issues as one misstep may inevitably destroy what we continuously work so hard for every day. I'm proud of Ericsson and the way our colleagues has responded to the issues facing our company. Over the last few years, we have operationally turned our company around, and our market position is strong. We're a leader in 5 gs development and continue to make significant investments in R and D. With the settlement in place, we are now able to look ahead and focus on our business. Ultimately, our ability to entrench our culture of ethics and compliance will be a cornerstone of our future success. With that, I believe it's time for some Q and A. Thank Our first question comes from the line of David Mulro from UBS. Please go ahead. Your line is now open. David, your line is now open. So please proceed with your question. Sorry, I was on mute. Just two quick questions. Firstly, whenever we had the last color on this and when you took a provision in Q3, I think it wasn't clear to you then yet whether other investigations in other regions around this and topics might kick off. I just wonder if you could give us an update on whether anything else has or you've had any kind of discussions with other regulators? And then secondly, in terms of the provision that will slightly unwind in Q4, I just haven't got my calculator right yet. But can you comment how much that will actually be in Q4? And will that also be accounted for in the other line or the other segment? For the question, I suggest Savi addresses the first and Karl the second. All right. Thank you for the question. I can confirm that as of yet, we are not aware of any other follow on investigations in any of the other countries. But of course, we continue to closely monitor the situation. Regarding the provision, I also heard the provision fully covers this amount. The pre adjustment interest came out slightly lower than we had expected or estimated earlier when we set up the provision. We will come back in the Q4 report to talk about the exact amount here, but a certain portion of the provision remaining after having paid the financial sanctions and fines and interest will be released. But the exact amounts, we will come back within the Q4 report. If I can squeeze in one quick follow-up. Obviously, between the two investigations, there's some countries where you haven't, it seems, faced criminal kind of investigational charges, whereas they did say on the SEC side there were breaches. Can you just help us understand where the difference is? Is it a different level of proof and confirmation they need for criminal? Or why aren't all countries under this explosive kind of settlements or investigations? Yes, good question. It's a technical question. And so I'm going to have to give you a technical answer. But the DOJ is a criminal enforcement proceeding. The SEC is a civil enforcement agency. So they do use different standards of proof, and they have different processes, and they use their own judgment when assessing the facts and processes, and they use their own judgment when assessing the facts and coming to conclusions. And so as part of the resolution with the DOJ, we have admitted to wrongdoings and specifically then as it regards bribery in one country, which is Djibouti. As far as the SEC is concerned, they have a different standard of proof. They have they apply their own independent judgment. And in order to resolve it, we have agreed to the entry of a final judgment in which allegations are being made of violations of the FCPA, including allegations of bribery in the 3 countries that we have mentioned earlier on. It's a different way of concluding matters, but that's basically what it is. But just to be clear, there's no risk that like I think you made the point already, but the DOJ knew what was going on, on all of the processes. They've just decided there's not enough proof to do anything about the other regions. They apply their own judgment, their own discretion, and they, of course, apply they use the same information. They apply their own discretion, and they have their own judgment that they apply to these things. So and they have a different standard of proof, a criminal standard of proof. Okay. Thanks very much. Our next question comes from the line of Stefan Slowinski from BNP Paribas. Please go ahead. Your line is now open. Yes. Thank you. Thank you for taking my question. Just a question around the guilty plea in Djibouti. And do you see that or anything else that's been announced today having any commercial impact for Ericsson going forward? I think you've mentioned in the past that you've been pretty transparent with your customers about this ongoing process. So I was just wondering if there's any customers that to date have signaled to you that they would need to review their dealings with Ericsson as a result of this outcome? Thank you. Thanks for the question, Stefan. We have, as we have said all along, also been transparent with customers and have a continuous dialogue with our customers. And to date, we have not seen or have not had any negative comments to that effect that it would impact future business. But this is, of course, something we will continuously discuss with our customers. Our next question comes from the line of Jesper Mortanda from Dagens Industrie. Please go ahead. Your line is now open. Thank you. Regarding the civil charges brought forward by the SEC, in your statement, you formulate yourselves as that there were allegations of violations of the bribery and accounting provisions of the FCPA. Does this mean that Ericsson disagrees with these allegations and actually admits to no wrongdoings regarding the SEC? All we're going to say is that in the judgment, there are allegations made. They are what they are, and we won't comment on them any further. Unlike with the DOJ. It's a different way of concluding matters. Our next question comes from the line of Peter Rawat from Swedish Television from the Public Services. So we have to repeat the question in English for all our this is an international broadcast. So, Ola will translate. Thank you, Peter. I believe the question was around, as we state in the release, that the internal controls and the compliance program was inadequately implemented, to what extent did you, Borje, call as part of the Board at the time, what is your responsibility? I believe I captured that correctly, Peter. Yes. What's your and the board's responsibility for not ensuring that the control system was in place? So first of all, I think it's the fact here is that we had certain employees in some markets, and they were executives in those markets. They clearly acted in bad faith and they actually knowingly failed to implement sufficient controls, that allowed them to enter into transactions for illegitimate purposes. And together with people under their influence or reporting to them, they could use very sophisticated schemes to hide this wrongdoing. That I think is important to remember. And we had a compliance program in place and actually a strong control framework. However, as I said here, they were not adequately implemented. That's quite clear as well. And the board here was updated regularly on the progress of the compliance program and on investigations. But I would also say here that it was only over time that the severity of the issues became clear and the board appointed external adviser in 2016 to review the compliance program and formulate a comprehensive remediation program. So you can say this is as the board became aware, we took the actions to correct and improve as much as possible. Yes. But that was like about 10 years from where it started. Is that fast enough? The reality is you have to take actions as you see them. And it was actually not until 2016 that we had the indications that the program was not good enough. Okay. Last question The reality there is Yes. Yes. Last question then. Do you think it's possible to have to maintain legal business in some countries? Or is it wise to not do business in certain countries or back off certain countries, which is not why it's not possible to do legit business? I mean, there are always countries where there are actually prohibitions to make business. But what we see is that with a strong compliance program and a thorough process for ensuring the way we conduct business, we can be in most of the countries on the planet. Okay. Thank you very much. Our next question comes from the line of Sandeep Deshpande from Company Not Given. So please state your company when the line is open. Your line is now open. Yes. Hi, it's JP Morgan. Mohit, one question for you. This appointment of this monitor under this program, will this impact you in terms of being able to do business in any places in the sense that will any new contracts, etcetera, which have be signed have to go through this monitor and thus impact quick decision making? I mean, the what we see here is the corporate monitors are engaged to review the company's compliance with the terms of the settlement and to report to the U. S. Authorities on the progress of implementing what we are committed to implement. And of course, that scope is going to vary. But what we see also is that we can continue to do business in the countries we are in. But of course, we need to be compliant. And that's the way I would conduct the business anyway. And it has to be conducted that way. So I don't see that to impact our business. It's I would expect that to be the case anyway. We appear to have no further question. Our last follow-up question has been submitted by Peter Wright from the Swedish Television Public Service. Yes. One more question here. Is there any legal procedures with any employees at the moment right now? Or are Ericsson enforcing any legal position contra our former employees right now? Well, you have to say we're not aware of any legal procedures right now Against these, yes. But as a statement here, I think it's fair to say that we want all the wrongdoers to be held accountable for the actions they have taken. And we are looking into and evaluating different options to take legal actions against former employees. But we have not decided that yet. We appear to have no further questions at the time. So I hand the conference back to the gentlemen in the room. Thank you. Thank you. Then we will ask Borje to some closing remarks. So ultimately, we must recognize that it's not just about policies and internal controls. It's also about people and culture. We must ensure that everyone at Ericsson adheres to the highest standards and principles at all times if we are trusted with empowering communities around the world. Basically, ethics and compliance must be at the heart of our business because it's just not the smart thing to do, it's the right thing to do. This settlement puts an end to a long and wide ranging process, and we are now able to move forward and fully focus on building a stronger company and support our customers on their journey into the 5 gs era. And with that, we will end today's conference call. Please remember that this call was recorded, and the replay version will be available for your convenience using the dial in numbers as detailed in the invite. Thank you very much for taking the time to dial in, and have a nice weekend.