AGM 2019

Sep 26, 2019

Ericsson's Conference Call. Throughout the call, all participants will be in listen only mode. And afterwards, there will be a question and answer session. Just to remind you, this conference call is being recorded. Today, I am pleased to present Ola Remde, Head of Communications. Please go ahead with your meeting. Thank you, Marc. Good morning, everyone, and welcome to this conference call following Wirtgen's announcement that we make a provision for expenditure related to resolving the U. S. Investigations. With me on this morning's call, I have President and CEO, Borje Ekholm CFO, Karl Melander and our Chief Legal Officer, Fabje de Mallen. After brief remarks, we will take questions. But I would like to underline at the outset that after final resolution process is still ongoing, Bergstrom cannot make additional comments beyond what is contained in the press release. 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 report as well as in our annual report. With that said, I would like to hand over the call to Borje Ekholm for further comments. Borje, over to you. Thank you, Olga. Good morning, and welcome to this call, and thank you for joining us. I will start by saying that this is a sad chapter in an otherwise proud history we have. We have failed in our own execution, and I feel personally very upset to find the company in this position. And I can promise you that the leadership team, including my own myself, we're doing everything to ensure that it can never happen again. I wish that we could share much more with you today about the situation. But sadly, I will only be able to discuss what we have disclosed in our press release. Once we have concluded this process, we will, of course, provide you with the relevant facts. As a starting point, and you know this and are well aware, we have been voluntarily cooperating with the American authorities, DOJ and SEC regarding investigations into Ericsson's compliance with the U. S. Foreign Corrupt Practices Act, and we have been cooperating with the SEC and DOJ since 2013 'fifteen, respectively. As we said in our Q2 report, we have for a while been conducting ongoing settlement negotiations. While the settlement process is yet to be finalized, we can now reliably estimate the cost to resolve the matter and have thus decided to make a provision, which will impact the Q3 of 2019, SEK 12,000,000,000. The provision constitutes our current estimate of expenditures related to resolving the U. S. Investigations. U. S. Investigations covers a rather extensive period up until the Q1 of 2017, And they have redeemed breaches of the company's conduct or company's photovisdefectics and the FTPA in 6 countries: China, Tbilisi, Indonesia, Kuwait, Saudi Arabia and Vietnam. One thing I want to be very clear about is that we are taking this situation very seriously. Our goal is and has always been to bring about positive change in society. We take great pride in our track record of innovation that has helped connect people and businesses for more than 140 years. And we have always strived to work responsibly and with integrity, placing great importance on how we do business. But despite these high ambitions, we have clearly failed in our execution. In the course of the investigations, we have identified breaches of our cost of business ethics and the FCPA. It is our assessment that the breaches are the result of several deficiencies, including a failure to act red flags and inadequate internal controls, which enables the limited number of employees to actively circumvent internal controls for illegitimate purposes. Recipinary measures, including terminations, where appropriate, have been taken against identified individuals. Actually, it is embarrassing that we did not take quicker actions following the initial questions from SEC back in 2013. After a review in the end of 2016, we realized that we did not have a compliance program for purpose. So over the last 2 years, we have addressed these shortcomings, and we're significantly enhancing our ethics and compliance program to ensure that we are equipped in the business in the right way. And our Legal CLO, Xavier de Dalen, will speak more about this shortly. While the financial sanctions replace also severe, it is also a critical step for our company to get closure with the U. S. Authorities on these matters. Over the last 2 years, we have turned around our company and established a strong market position and 5 gs leadership and continued investments in R and D. With today's announcement, I'm pleased that we are confronting another important legacy issue and taking the next step to resolve it so we can focus on our business strategy. I'm convinced that Ericsson has the right team in place to lead the company forward and implement our strategy. We have put in place a very strong vetting program of all our senior executives and with today 2 years, we have worked diligently on strengthening our balance sheet, and we are prepared for the significant signs. But we are fully intent on delivering and remain committed to our financial targets going forward. With that, our CFO, Karl Melander, will now talk to you through the financial effect of today's question. Thank you, Borje, and good morning, everyone, on the call. And as you see in the press release of today and as Borje also mentioned, we are now in a position based on the progress of the discussions with the authorities in the U. S, estimate the cost and make a decision in our books. And this will impact the Q3 2019 result of SEK 12,000,000,000. And this constitutes the current estimate of expenditure related to resolving the investigations, of which the combined fines from SSE and DOJ is estimated to $1,000,000,000 and the remainder in the provision here pertains to other costs related to resolving the investigation. We will book the provision as other operating expense in the income statement of segment emerging business and other. And while obviously the amount that we make a provision for today is significant, we can also confirm that we will be able to manage the associated cash outflow with available funds. And as you will recall, the balance sheet strength we reported here in our recent Q2 earnings report included a gross cash amount of SEK69 1,000,000 and a net cash position of SEK34 1,000,000,000. So our capital structure strategy and our funding plans will remain intact. As regards to debt funding side, for general corporate purposes, we intend to continue with the current plans to refinance maturities as they come up in due course given market conditions. And as to cash flow generation, you will recall in the Q2 report, we generated free cash flow before M and A of CHF 2,200,000,000 compared with a negative €200,000,000 the same period last year. And year to date, we reported free cash flow before M and A of $6,300,000,000 compared to $600,000,000 same period in 2018. Cash flow generation has clearly improved over the years. And as you will recall, within these numbers, we also had absorbed payouts for restructuring and other provisions of a total of SEK 6,900,000,000 for the first half twenty nineteen. We continue, of course, our strong focus on generating positive free cash flow also going forward. We will also continue to execute on the focused strategy, and it includes investments for technology leadership and competitiveness. And as you know, this has had a positive effect also on our gross margin development. So we'll continue and reinforce our already prudent approach to investment and cost, which includes targeting profitable growth in a selective and disciplined fashion. Following the full achievement of our €10,000,000 cost and efficiency program, we've continued and we will continue to strictly manage spend levels and pursue productivity improvements in every unit of the company. As we said, we remain completely committed to the financial targets for 2020 and 2022, and there's nothing in today's announcement that would change this commitment. Our targets, as you know, are to reach an operating margin of more than 10% in 2020 and more than 12% in 2022 with all segments contributing. As the discussions with U. S. Authorities eventually close, the final amount will be determined and along with that also the timing of payments and consequently the cash flow effect. And we assuming that the process runs now according to current plan, we could expect the payment to happen during the Q4. And from what I understand, at least payment of this type of finance typically required within a short time frame following the conclusion of settlement agreements. And of course, as soon as we have more information to share, we will do so definitely. And with that, I will hand over to our Chief Executive Officer, Xavier Gedolan. Please, Xavier? Thank you very much, Karl, and good morning, everyone. As Berri already mentioned on this call and as we have disclosed previously, we have been cooperating with the SEC and DOJ ever since their FCTA investigations commenced in 2013 and 2015, respectively. As part of our cooperation, we conducted our own internal investigations and found breaches of the company's Code of Business Ethics in the FCPA, and we have shared our findings with U. S. Authorities. We continue our discussions with PSEC and DOJ on finding a resolution to the investigations. And as announced today, based on the current status of our discussions, we are now in a position to reliably estimate the funds needed to resolve the matter. As stated, this is an ongoing legal process with both agencies and that's a process that we need to respect and therefore we're not in a position to further comment beyond what we have communicated already today. Our focus is to learn from past mistakes and ensure that we emerge from this better equipped to conduct business in a responsible way that is consistent with our zero tolerance towards corruption. The company has in the last couple of years and with the help of external expert advisors and has taken significant efforts in building a robust compliance program supported by a strong tone from the top, targeted training and awareness initiatives, increased compliance resources as well as the deployment of risk based controls and processes. These efforts are further supported by a reinforced network of assurance functions including the company's compliance organization. Our goal is to ensure that we do not repeat these mistakes of the past and that we maintain trust with our stakeholders in all markets around the world in which we operate. This work will never stop, and we will remain relentless in our pursuit to deliver on our ambition to be world class when it comes to the responsible business analytics and compliance. With that, Maria, I hand back over to you. Thank you, Xavier. As I said in the beginning, this business update for Ericsson. I will reiterate Javier's point that we have an absolute zero tolerance for corruption and can sweep action against any type of behavior come to be in violation of our robust corporate business ethics. While the financial penalties we face are substantial, to move towards a closure with the U. S. Authorities on these matters is critical for our company. We will continue to foster the culture where we take responsibility and accountability all with ultimate accounts. With that, I believe we have time for some Q and A Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. Our first question comes from the line of Amit Bhatiaj Kundani of Citigroup. I'm Amit Bhatchandani from Citi and thanks for letting me on. I appreciate the process is still ongoing. So please let me know if you are in a position to answer this or not. Firstly, in terms of the risk for the company, in the past, I think Q3, 2018, you talked about 50 employees being asked to leave the company due to internal investigation. And I was wondering if there was any update on that number and whether you've had to take more actions since then between then and today? And as a follow-up around the employees, do you see a risk that there could even be execution or charges taken against employees in different jurisdictions that you operate in, separate from the ongoing investigations in the U. S? First of all, it's as you already have noted, it's hard for us to answer or give the full answers given that we're still in the process of resolving this with U. S. Authorities. But what I can say is that the shift to pieces that we have taken action against that we've taken as we found or completed our own investigations and we call back over the past several years. We know that we continuously in a big company like Ericsson, there will be the liability growth employees, and we continuously take actions against those. But I would not necessarily say that to be the activation as there are a number of people who have taken action again over the last 2 years or so or 1 year, even last week, so to say. And that will continue as we do. And I believe it's critical that we have a compliance program where we can see very quickly any misbehavior. So we can quickly take corrective actions and take disciplinary actions as appropriate. And we're doing that. So it's too early to speculate on the risk of it's hard to meet the comments. We may know more as we reach the resolution on this process. If I may just clarify one point here. So as Barry mentioned, there's some 49 people or so who are no longer with the company. In total, so far, 65 employees that were identified have been subjected to a disciplinary review. And what we can confirm is that 49 of those are no longer with the company. But it's through the right of different ways that they're no longer with the company. So we wouldn't comment any further on that. But that's those are the numbers as we have them today. And our next question comes from the line of Johanna Alquist of Stifel. Yes. Two questions, if I may. First of all, if you can say anything on what other countries besides the 6 included in this investigation and have the scope in wider that is narrowed down during the process. And if you can say anything on sort of what exactly you have been doing in those 6 countries? Were there sort of pure drives, gaining contracts? And from how long period of time? I know you said up until Q1 2017, but if you could give any flavor on that would be very helpful to see that it won't repeat again. I can say, and Johan, it's really, as we said and I've already said this, it's unfortunate that we can't answer on all the questions. Now I think it's still an ongoing matter. What I can say is that it has covered several geographies over a long period of time, but the investigation has come from the countries remain here. Then the behavior of the contract, we cannot comment on in detail now. We can say that we have breaches about how those different assets, and we have seen that in our own investigations. And that's pretty hard to say. And when this effect, we can clearly have many more answers. Okay. And then maybe if I may one final question. The €2,000,000,000 in extra cost, what are those related to? Are they sort of legal fees? Or what are they? They are related to cost protection or these claims and these investigations. It could include cost of ownership, for example. And our next question comes from the line of Johan van den Bergh of Nordea. Our next question then comes from the line of Daniel Ullman of Sveriges. Please go ahead. Your line is open. Thank you. We have to switch radios to investigate suspected rights in Ericsson in 2007. The investigation reviewed suspected rights in several countries with documented payments for the 2 leaders and in the company's ethical code. Every time we ask Ericsson denied responsibility for the leaked bribe. So first, was it wrong not to indicate this matter better at that time? And do you today agree that Ericsson had paid that price in order to secure business deals? As and I know you will not be happy with the answer in order to say that. But it's very hard for us to comment on any specifics. And we can only comment on what we have said in the press release at this point in time because it is still an ongoing matter. So I wish I could be much more transparent now, but I think it's a note. Yes. But was it wrong not to investigate these allegations more thoroughly before? Yes. Matters have been investigated. They have been reviewed. That has happened. And what we have seen, though, is that we have not had a we have clearly failed in our execution. I cannot comment on your specific question because I don't know the details of it. But clearly, our compliance program has not been disclosed. That's quite clear, and we have not been good enough on the execution of Okay. And we have your competitor with Negeo Bank back on the line. So please go ahead. Your line is open. Yes. Good morning. Can you hear me now? We can, yes. Okay. Thank you. Yes, two questions, if I may. First one relates to the comment on reputational risk and the impact on sales. Have you, during the period when the details of how this probe has been known, seen any effect on your sales or sentiment from your customers negatively affecting your EBITDA sales? And the second question relates to the size of the finance and your confidence in it. Are you rather erring on the high side when you make your position? Or how should we think about the tax increment, sorry, about the size of the fines? Thank you. The slides are defined. We are trying to do our best estimate of what we think the provision should be. And we feel that we just have been able to where we are in the settlement process, we can now make that assessment, and that's what we do in the SEK 12,000,000,000. So it's clearly our best estimate. Then on the question so far, we have not seen any impact on our business, which is which is perfectly well known to our customers as well for a long period of time. We have disclosed a law under investigation since I think we were first disclosing that incentive in Raul, you have to correct me, but that's actually no secret. So to be very clear to our customers about that, and we have not seen any effect on the current business. Thank you. Our next question comes from the line of Max Viessmann of Citi. Please go ahead. Your line is open. Yes. Good morning, everyone. I'm representing the credit side of SEB here. My question is, have you been in contact with credit rating agencies ahead of today's announcement? Given that this is material information, we cannot go to separate or disclose this information separately to anyone. Our next question comes from the line of Fredrik Nystrom of Omenfunde. You mentioned that last year's address shortcomings in your internal work. Can you elaborate a little bit what main shortcomings have you identified and what measures have you taken to address those? I mean, as we already said, we've been working with external advisers on assessing the process of our compliance program. As a result, we have put in place a prioritized work plan to improve where we have seen efficiencies. The areas where we are focusing on right now are the areas of leadership and culture, reflecting the tone from the top, continuous training and engagement, personnel remediation, which we mentioned earlier already and also putting in place a robust vetting process for our management. Another area is 3rd party management, where we have enhanced 3rd party management, including the diligence of 3rd parties And where increased corruption of money laundering risks arise, take proactive measures to preempt those. We have spent quite a bit of time and effort on increasing the robustness of our compliance function and other assurance functions, including the allegations management process. And we also, together with the finance function, have been working on making our internal controls, the processes more robust and rely more on digitalization, if you like, of those controls to better detect and preempt any suspicious transactions. So these are the areas that we are focusing on right now. Our next question comes from the line of David Mulholland of UBS. Hi. Just two quick questions. Firstly, on the €12,000,000 provision, obviously €10,000,000,000 of that is the or so is defined. But can you just help us understand in the incremental of that, I assume that's just the implementation and other things you're doing internally rather than any other potential investigations that you're provisioning for. And then the second question, just on the commentary that you've put in the additional risk factors. Can you possibly comment on, at this stage, any reaction you've seen from customers or suppliers? Obviously, it's early in terms of the announcement today, but they've known for a couple of quarters as to what's been going on. So I wonder if you could just help us understand, has the initial response or issues from that perspective to this point. So this is Karl. Lance is the first well, the first question on the prediction. What I can say on the latter one is that, of course, we have had discussions with our customers about the investigations. And I would say that we have a strong working, taking the actions to do on building assets from compliance programs. And of course, they regret everyone's decision, but it's as they're also reinforcing the notion, it's more important how you tackle the issue going forward than what you think the gaps and the shortcomings. And that's really what we have tried to work on very diligently over the last few years. So with that, Karl, why don't you answer the other question? Yes, sure, Tobias. So as you rightly said, the USD 1,000,000,000 is the estimated amount for the combined fine from both authorities. And the remainder that relates to other costs related to resolving these investigations. So there are various examples of other costs that could be an interest component, could be monitorship, for example, and costs related to resolving the issues that come up in the investigation from the authorities. Maybe just one quick follow-up. And I know it's going to be hard to answer this one, but I thought I'd try anyway. In terms of the potential further jurisdictions to look at this, can you just comment actually at this point? Has anything else started at this point? Obviously, there's potential thoughts going forward, but do you know of anything at this point? Or are you just flagging it as a risk that they may that something else may kick off in other jurisdictions on the same basis? Nothing has restarted at this point in time. And as we said, that it's a risk factor going forward. Thank you. Our next question comes from the line of Frutik Littel of Danske Bank. Please go ahead. Your line is open. Thank you. Thank you for taking my question. I just had a follow-up on the comments on the monitorship sort of external auditors. Can you explain how you see that right now? Do you know that is part of this package? Or is it something that you estimate yourself that, that is likely to show up? And in that case, what do you sort of figure in terms of years and so on that, please, we don't? Sudhak, please answer that, Fabia. Sure. So for these types of measures, it would not be unusual to end up with a monitorship. As we have said already now repeatedly, we can't get into the details of where we are in the discussions with the authorities, but it will not be a surprise if we ended up with a monitorship. Monitorships with the U. S. Authorities typically are between 2 3 years. And so we'd have to see where we come out with the authorities. As I said, we don't want to preempt the outcome of the discussions, but that's typically what we should expect. And our next question comes from the line of Nick Fils at The Financial Times. Please go ahead. Your line is open. Can I just clarify, I think you said, although you're booking in the 3rd quarter, you expect so you're saying you expect this to be resolved in the Q4? Can I just clarify that's the case? And I just also just wanted to know a bit more about the estimate, how do you transfer estimate? Obviously, you're pretty confident at this stage that that's the sort of ballpark, but just a little bit of detail about why you think that. We did record the provision in the Q3, and this is the best estimate of the size of the provision we can do. And of course, it's based on the settlement negotiations we have with the U. S. Authorities. So we believe this is a good estimate. Then typically, we would expect this to be depends on how quickly we resolve the negotiation, and that's always hard to predict. And how we think it's likely that we will do that during the Q4 and that would include both the payment of the funds. Thank you. And we have a follow-up from Daniel Orman of Swedish Radio. Please go ahead. Your line is open. Yes. Thank you. I just wanted to add, there is an ongoing trial against the former high ranking aircraft officials in Athens in Greece regarding suspected bribes in the deal involving the area, data system there, sold to Ericsson. And this is also, as I understand, the part of the U. S. Investigations. Ericson has before denied any wrongdoing there. Has this position changed? The reality is the investigation by the U. S. Authorities, and as you can understand, covers very long periods of time, and it covers many geographies. And that's what you have that's what we're trying to say. And it's very hard for us to go into the details at this point in time. I know, Donnie, you will not be happy with that answer, but the reality is we need to conclude the negotiation with the U. S. Authorities before we stop the deployment on any ongoing activity that might or might not have been part of this. I'm sorry, but I hope you can respect that as well because we need to resolve these matters. For us as a company, we need to be able to also move forward and focus on the issues for tomorrow and we'll be in a stronger area from 5 of 10 years out. That includes covering up all the shortcomings and gaps we've seen in our historical performance and in our historical compliance programs. And that's really what we're working on. I'm asking also Vane, just to clarify one point to the question. We understand that U. S. Authorities are aware of what's going on in Greece, but we would also like to refer you back to our press release and to the countries that I mentioned. I don't believe Greece is on that list. But can you exclude that mortgages will be on that list? I think you have to respect what we're trying to say that we disclose we're trying to be as transparent as we can on what we can disclose. The way we're still in negotiations with the U. S. Authorities, we need to assess those before we can answer more questions you Okay. Thank you. Thank you. Operator, I think we will now move to our closing remarks. So Borje, please go ahead with those. So thank you for all the questions. And I'm sorry, we cannot answer all of them. But we still have to resolve all the outstanding violation to the U. S. Authorities. So we are not at the conclusion yet. But the resolution of these investigations by the U. S. Authorities will, of course, allow us to increase our focus on building a stronger area for the longer term. I would say we've made significant progress on our operation and on our business over the last few years. But of course, we have seen more to do. We still have more ambitions than we have delivered so far. However, I want to really make it clear that we are in a position to deliver on our strategy and on our targets. So we will continue to work to lead the 5 gs market with less than R and D and be the stronger Aerithon for the long term. Throughout the company, we work relentlessly to make sure we won't just follow our assessment processes, but that ethics and compliance are enshrined in our culture. We will do our utmost to ensure that we don't we're on. So with that, I'll hand over to you. Thank you, Borje, and thank you, everyone, for joining today's call. We will end here. And please remember that this call was recorded and a replay version will be available for your convenience using the dial in numbers as detailed in the invite. Thank you very much and goodbye. This now concludes the conference call. Thank you all very much for attending. You may now disconnect your lines.