Ericsson's conference call. Throughout the call, all participants will be in listen-only mode. Afterwards, there'll be a question and answer session. Just to remind you, this conference call is being recorded. Today, I'm pleased to present Ola Rembe, Head of Communications. Please go ahead with your meeting.
Thank you, Mark. Good morning, everyone. Welcome to this conference call following Ericsson'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, Börje Ekholm, CFO, Carl Mellander, Our Chief Legal Officer, Xavier Dedullen. After brief remarks, we will take questions. I would like to underline at the outset that as the final resolution process is still ongoing, Ericsson 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 Börje Ekholm for further comments. Börje, over to you.
Thank you, Ola. Good morning. Welcome to this call, and thank you for joining us. I would start by saying that this is a sad chapter in an otherwise proud history we have. We have failed in our own execution. I feel personally very upset to find the company in this position, and I can promise you that leadership team, including 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. Sadly, I will only be able to discuss what we have disclosed in our press release. Once we have completed this process, we will of course provide you with the relevant facts.
As a starting point, 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. We have been cooperating with the SEC and DOJ since 2013 and 2015 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 third quarter 2019, SEK 12 billion. The provision constitutes our current estimate of expenditures related to resolving the U.S. investigations.
Investigations covers a rather extensive period up until the first quarter of 2017, and they have revealed breaches of the company's code of business ethics and the FCPA in six countries: China, Djibouti, 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. Despite these high ambitions, we have clearly failed in our execution. In the course of the investigations, we have identified breaches of our code of business ethics and the FCPA.
It is our assessment that the breaches are the result of several deficiencies, including a failure to act to red flags and inadequate internal controls, which enabled a limited number of employees to actively circumvent internal controls for illegitimate purposes. Disciplinary measures, including terminations where appropriate, have been taken against identified individuals. Naturally, it is embarrassing that we did not take quicker actions following the initial questions from SEC back in 2013. After reviewing the end of 2016, we realized that we did not have a compliance program fit for purpose. Over the last two years, we have addressed these shortcomings, and we're significantly enhancing our ethics and compliance program to ensure that we are equipped to do business in the right way. Our legal CLO, Xavier Dedullen , will speak more about this shortly.
While the financial sanctions we face are severe, it is also a critical step for our company to get closure with the U.S. authorities on these matters. Over the last two years, we have turned around our company and established a strong market position and finally leadership to continue the investment in R&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 over all our senior executives, and we today have a very strong team in place. Over the past two years, we have worked diligently on strengthening our balance sheet, and we are prepared for the significant fines.
We are fully intent on delivering and remaining committed to our financial targets going forward. With that, our CFO, Carl Mellander, will now talk you through the financial effect of today's provision.
Thank you, Börje. Good morning, everyone, on the call. As you see in the press release of today, as Börje 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 provision in our books, and this will impact the third quarter 2019 results by SEK 12 billion. This constitutes the current estimate of expenditure related to resolving the investigations, of which the combined fine from SEC and DOJ is estimated to $1 billion, 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.
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. As you will recall, the balance sheet strength we reported here in our recent Q2 earnings report included a gross cash amount of SEK 69 billion and a net cash position of SEK 34 billion. Our capital structure strategy and our funding plans will remain intact. As regards to the 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. As to cash flow generation, as you will recall in the second quarter report, we generated free cash flow before M&A of SEK 2.2 billion. You can compare that with a negative SEK 0.2 billion the same period last year.
Year-to-date, we reported free cash flow before M&A of SEK 6.3 billion compared to SEK 0.6 same period in 2018. Cash flow generation has clearly improved over the years. As you will recall, within these numbers, we also had absorbed payouts for restructuring and other provisions of a total of SEK 6.9 billion for the first half of 2019. We continue, of course, our strong focus on generating positive free cash flow also going forward. We will also continue to execute on the focus strategy. This includes investment for technology leadership and competitiveness, and as you know, this has had a positive effect also on our gross margin development. 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 SEK 10 billion cost and efficiency program, we've continued, and we will continue to strictly manage spend levels and pursue constant productivity improvements in every unit of the company. As Börje said, we remain completely committed to the financial targets for 2020 and 2022, and there is 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. Assuming that the process runs now according to current plan, we could expect the payment to happen during the fourth quarter.
From what I understand at least, payment of this type of fine is typically required within a short time frame following the conclusion of settlement agreements. Of course, as soon as we have more information to share, we will do so definitely. With that, I will hand over to our Chief Legal Officer, Xavier Dedullen. Please, Xavier.
Thank you very much, Carl, and good morning, everyone. As Börje already mentioned on this call, and as we have disclosed previously, we have been cooperating with the SEC and DOJ ever since their FCPA 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 and the FCPA, and we have shared our findings with the U.S. authorities. We continue our discussions with the SEC and DOJ on finding a resolution to the investigations. 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 are 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, has undertaken 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. We will remain relentless in our pursuit to deliver on our ambition to be world-class when it comes to the responsible business ethics and compliance. With that, Börje, I hand back over to you.
Thank you, Xavier. As I said in the beginning, this is a sad day for Ericsson. I will reiterate Xavier's point that we have an absolute zero tolerance for corruption and take swift action against any type of behavior found to be in violation of our robust code of 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 a culture where integrity, responsibility, and accountability are what ultimately counts. With that, I believe we have time for some Q&A before the ending.
Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you'd like to ask a question, please press 01 on your push button phone. If you would prefer to decline from the calling process, please press 02 to cancel. As always, please limit yourselves to one question at a time, and please keep your questions at a broad level. Our first question comes from the line of Anuj Archandani of Citigroup. Please go ahead, your line is open.
Good morning. I'm Archandani from Citi. Thanks for letting me on. I appreciate the process is still ongoing, so please do 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. 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. As a follow-up around the employees, do you see a risk that there could even be prosecution or charges taken against employees in different jurisdictions that you operate in, separate from the ongoing investigations in the U.S.? Thank you.
First of all, as you yourself noted, it is hard for us to answer or give the full answers, given that we are still in the process of resolving this with the U.S. authorities. What I can say is that the 50 people that we have taken action against, that was taken as we found or concluded our own investigations that we have conducted over the past several years. We know that in a big company like Ericsson, there will be what I would label rogue employees, and we continuously take actions against those. I would not necessarily tie that to this investigation, but there are a number of people we have taken action against over the last two years as well, or one year. Even last week, so to say.
That we continuously do. 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. We're doing that. It's too early to speculate on the risk of prosecution. I think that is something, to some extent, in the hands of the authorities as well. It's hard for me to comment. We may know more as we reach a resolution on this process.
If I may just clarify one point here. As Börje 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. What we can confirm is that 49 of those are no longer with the company. It's through a variety of different ways that they are no longer with the company. We wouldn't comment any further on that. Those are the numbers as we have them today.
Thank you.
Thank you. Our next question comes from the line of Johanna Ahlqvist of DNB. Please go ahead, your line is open.
Yes. Two questions, if I may. First of all, if you can say anything on whether other countries besides the six included in this investigation, have the scope been wider and that it's narrowed down during the process? If you can say anything on what exactly you have been doing in those six countries, were they pure bribes, gaining contracts, and from how long period of time? I know you said up until Q1 2017, but if we can get any flavor on that, would be very helpful to see that it won't repeat again. Thank you.
I can say, Johanna, as we said, and I've already said this, it's unfortunate that we can't answer on all the questions now, as this is 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 focused on the countries we named there. The behavior and the conduct, we cannot comment on in detail now. We can say that we have breaches of our code of business ethics, and we have seen that in our own investigations. That's where we are today. When this is settled, we can clearly have many more answers.
Okay, thank you. Then maybe if I may, one final question. The SEK 2 billion in extra cost, what are those related to? Are they legal fees or what are they?
They are related to costs, potential or these claims and these investigations. It could include cost of monitorship, for example.
Thank you.
Thank you. Our next question comes from the line of Joakim Forsberg of Nordea. Please go ahead, your line is open. I see Joakim left the queue. Our next question comes from the line of Daniel Djurberg of Sveriges Radio. Please go ahead, your line is open.
Thank you. We at the Swedish Radio started to investigate suspected bribes in Ericsson in 2007. Investigation revealed suspected bribes in several countries with documented payment to political leaders and breach in the company's ethical code. Every time we asked, Ericsson denied responsibility for the alleged bribes. First, was it wrong not to investigate this matter better at that time? Do you today agree that Ericsson had to pay that bribe in order to secure business deals?
I know you will not be happy with the answer. I can already say that. It's very hard for us to comment on any specifics. 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. I wish I could be much more transparent now, but I think we cannot.
Yeah, was it wrong not to investigate these allegations more thoroughly before?
The matters have been investigated, they have been reviewed, and then that has happened. What we have seen, though, is that we have clearly failed in our execution. I cannot comment on your specific questions because I don't know the details of it. Clearly our compliance program has not been fit for purpose. That's quite clear, and we have not been good enough on the execution of that.
Okay, thank you.
Okay, we have Joakim Forsberg of Nordea Bank back on the line, 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 about this probe has been known, seen any effect on your sales or sentiment from your customers negatively affecting your sales? The second question relates to the size of the fine and your confidence in it. Are you rather erring on the high side when you make your provision or how should we think about the confidence or about the size of the fine? Thank you.
Thank you. The size of the fine. We are trying to do our best estimate of what we think the provision should be, and we feel that we 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 billion. It's clearly our best estimate. On the question, so far, we have not seen any impact on our business, which has been well known to our customers as well for a long period of time. We have disclosed that we are under investigation since, I think we were first disclosing that in 2015 or 2016. Ola, you have to correct me. That's actually no secret. We've been very clear to our customers about that, and we have not seen any effect on the current business. Okay, thank you.
Thank you. Our next question comes from the line of Max Nyström of SEB. Please go ahead. Your line is open.
Good morning, everyone. I represent 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.
Okay, thank you. That's clear. Thank you.
Thank you. Our next question comes from the line of Fredrik Nyström of AMF Fonder. Please go ahead, your line is open.
Good morning. You mentioned that the last years have addressed shortcomings in your internal work. Can you elaborate a little on that? What main shortcomings have you identified, and what measures have you taken to address those?
I suggest Xavier here responds to that.
Thank you for the question. As we already said, we've been working with external advisors on assessing the robustness of our compliance program. As a result, we have put in place a prioritized work plan to improve where we have seen deficiencies. The areas where we are focusing on right now are the areas of leadership and culture, effective 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 third-party management, where we have enhanced third-party management, including due diligence of third parties, and where increased corruption or 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.
We also, together with the finance function, have been working on making our internal controls processes more robust and relying more on the digitalization, if you like, of those controls to better detect and preempt any suspicious transactions. These are the areas that we are focusing on right now.
Xavier.
Thank you. Our next question comes from the line of David Mulholland of UBS. Please go ahead. Your line is open.
Hi. Just a quick question. Firstly, on the $12 billion provision, obviously $10 billion of that is the fine. 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? 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. They've known for a couple of quarters as to what's been going on. I wonder if you could just help us understand, has there been any initial response or issues from that perspective to this point?
I think that Carl answers the first question on the provision. What I can say on the latter one is that, of course, we have had discussions with our customers about the investigations, I would think that we have felt a strong support in taking the actions to do on building up the compliance programs. Of course, we regret that we're in the position, but they're also reinforcing the notion it's more important how you attack the issue going forward and that you fix the gaps and the shortcomings. That's really what we have tried to work on with diligence over the last two years. With that, Carl, why don't you answer the other question?
Yes, sure. Thanks, Javier. As you rightly said, $1 billion is the estimated amount for the combined fine from both authorities. The remainder there relates to other costs related to resolving these investigations. There is 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 then. I know it's going to be hard to answer this one, but I thought I'd try anyway. In terms of the potential for other jurisdictions to look at this, can you just comment factually at this point, has anything else started at this point? Obviously, there's potential those going forward, but do you know of anything at this point, or are you just flagging it as a risk that something else may kick off in other jurisdictions on the same basis?
Nothing has started at this point in time. It's a risk factor going forward.
Understood. Thanks very much.
Thank you. Our next question comes from the line of Rufus Little of Danske Bank. Please go ahead. Your line is open.
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 yourselves that is likely to show up, and in that case, what do you sort of figure in terms of years and so on that this will go on? Thank you.
I suggest you answer that, Xavier.
Sure. 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. It would not be a surprise if we ended up with a monitorship. Monitorships with U.S. authorities typically are between two and three years. 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.
Thank you.
Thank you. Our next question comes from the line of Nic Fildes at the Financial Times. Please go ahead. Your line is open.
Good morning. Can I just clarify, I think you said, although you're booking it in the third quarter, is that what you're saying, you expect this to be resolved in the fourth quarter? Can I just clarify that's the case? I just also wanted to know a bit more about the estimate, how have you come to that estimate? Obviously, you're pretty confident at this stage that that's the sort of ballpark, just a little bit of detail about why you think that.
We will record the provision in the third quarter.
This is the best estimate of the size of the provision we can do. Of course, it's based on the settlement negotiations we have with the U.S. authorities. We believe this is a good estimate. Typically, we would expect this to be, depending on how quickly we resolve the negotiation, and that's always hard to predict. We think it likely that we would do that during the fourth quarter, and that would include the full payment of the fines.
Okay. Thank you.
Thank you. We have a follow-up from Daniel Öhman of Swedish Radio. Please go ahead. Your line is open.
Yes. Thank you. I just wanted to add, there is an ongoing trial against several former high-ranking Ericsson officials in Athens in Greece regarding suspected bribes in a deal involving the Erieye radar system there sold to Greece by Ericsson. This is also, as I understand, a part of the U.S. investigations. Ericsson has before denied any wrongdoings 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. That's what we're trying to say. It's very hard for us to go into the details at this point in time. I know, Daniel, you will not be happy with that answer, but the reality is we need to conclude the negotiations with the U.S. authorities before we start to comment 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 building a stronger Ericsson 5 to 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. That's really what we're working on.
I'm asking also-
If I may just clarify one point to the question.
Okay.
We understand that U.S. authorities are aware of what's going on in Greece. We would also like to refer you back to our press release and to the countries that are mentioned. I don't believe Greece is on that list.
Can you exclude that more countries will be on that list?
All we can say, Daniel, I think you have to respect what we're trying to say that we disclose, we try to be as transparent as we can on what we can disclose. Today, we're still in negotiations with the U.S. authorities. We need to settle those before we can answer all questions you have.
Okay. Thank you.
Thank you. Operator, I think we will now move to our closing remarks. Börje, please go ahead with those.
Thank you for the questions, and I'm sorry we cannot answer all of them. We still have to resolve all the outstanding negotiations with the U.S. authorities. We are not at the conclusion yet. The resolution of these investigations by the U.S. authorities will, of course, allow us to increase our focus on building a stronger Ericsson for the longer term. I would say we've made significant progress on our cooperation and on our business over the last two years. Of course, we have still 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. We will continue to work to lead the 5G market, invest in R&D, and build a stronger Ericsson for the long term.
Throughout the company, we work relentlessly to make sure we don't just follow our system and processes, but that ethics and compliance are enshrined in our culture. We will do our utmost to ensure that we don't hamper the trajectory we're on. With that, I will hand back to you.
Thank you, Börje, 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.