Telefonaktiebolaget LM Ericsson (publ) (ERICB) Earnings Call Transcript & Summary

Welcome to Ericsson's Conference Call. [Operator Instructions] Peter Nyquist will now open the call.

Good morning, everyone, and welcome to this call today. We will be handling the -- this morning's press release on the Iraq investigation. Reason behind having this call is that we have received quite a lot of questions mostly from the financial community lately. We will try, but we cannot maybe answer all the questions that will be asked during this call. We will do our best. So the setup will be that we will have an introduction by our President and CEO of Börje Ekholm for 10 minutes. Then we will spend therefore the time with Q&A. And during the Q&A, Börje will be supported by our CFO, Carl Mellander; and our Chief Legal Officer, Xavier Dedullen. But before starting the press -- the presentation, I would like to read this. During today's presentation, we will be making forward-looking statements. These statements are based on our current expectations and certain planning assumptions which are subject to risk and uncertainty. The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call. 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 word to you, Börje. So please.

Thank you, Peter, and thank you all for joining. First of all, of course, this is a serious matter, a very serious matter and involves embarrassing and unacceptable misconduct in the past. But before going into that, I want to start by making a little bit of a perspective on what we are going to do and have executed on over the past few years. And of course, this is -- and you all know this, and we have had controlled failures in the past, significant control failures in the past. And we've had a culture that has not allowed us to capture this behavior in time. So if we take just the recent report on Iraq, that's a behavior that started 2011, went on uninterrupted for many years until our new compliance efforts that was put in place in '17, '18 detected a suspicious expense claim and that led to a rollout of the number of misconducts and breaches of our code of business ethics. I'll come back and touch upon that a little bit more. But it's important that you understand that this investment we made in a strength and compliance effort that allows us to detect these things. But equally important is to strive towards changing the culture because it is -- we have these past wrongdoings They're hugely embarrassing but they still need to be tackled. And that's what we are trying to do. That includes changing the culture and that create the culture of speak up. So if you look for example, and take just to measure the progress of how many allegations we get internally. A few years ago, so within 2016, we had 145 reported compliance concerns. And this past year, we had about 1,000. So that allows our people to speak up when they see things and when they detect things. And this is the cultural journey we have to go through. It's a cultural journey of behaving in the right way, behaving ethically taking ethical decisions but it's also speaking up when you see something or hear something. And we invest significant resources in this. We have invested over the years in growing our compliance staff, compliance functions, but also our investigation functions. So we have made significant commitments on making progress and cleaning up the bad behavior we've had. I've been working on that. It feels like every single day since I came in to clean up that past, but it takes time. And unfortunately, we do uncover things that are bad and that are poor performance. But I would also say that we have 99% plus of our people delivering every day. I would never even consider a misconduct. But we need to have a culture in place where those 99% are truly empowered to speak up when they see and feel something. So here, over this year, we made progress. We made progress on the strategic side. You see that with our market share gains, our competitive product portfolio. You see the financial numbers but we're also doing something on the -- or call it, on the cultural side, where we're making progress. And I think to speak up the number of allegations is a progress indicator but we have more to do. So in this specific case, it's, of course, very hugely embarrassing and hugely unsatisfactory. But we still need to tackle them, and we need to deal with the situation. We are going to continue to do that because we are determined as a team in the company to really rule out past misconducts and poor performance. And I remain firmly committed to doing that. I think maybe we should move on, Peter.

Yes. Thank you, Börje, for those words. So I'll open up, operator, Mark, for Q&A.

[Operator Instructions]

Thank you, Mark. I think we have the first question here from Peter Kurt Nielsen from ABG. Sorry, it's Aleksander Peterc from Societe Generale.

I guess the most important question I would have really is, if you could help us understand what is your assessment of the maximum financial damage to Ericsson from today's revelations of breaches of your DPA. Are we looking at a potential additional fine this could be of a similar order of magnitude as the December 2019 fine or settlement? Or is it something a little bit more marginal? Just if you could give us a range of possibilities here. I guess investors are entitled to know if the damage is potentially destabilizing your financial position? And if it has any implication on your ongoing bid for Vonage as well.

Aleksander, it's a very good question, and I wish we could answer. We cannot assess that today, we do not have information enough to provide you with any type of guide. So it would be incorrect to try to do that. So I have to refrain from answering. Regarding Vonage, we believe that we can still proceed as per before. So we do not believe or expect it will impact the process. But of course, given the situation, we can never rule out anything, but I do not see that to be impacted.

We'll move on to next question from Andrew Gardiner from Citi.

One question I have is just a clarification. Can you just draw a distinction between the breach of the deferred prosecution agreement of which you notified the market last year in October and today's update. Is it correct to say that last year's notification was to do with misconduct in a country other than Iraq. And then now you've got these 2 additional issues, the insufficient disclosure on Iraq under the original settlements and then the insufficient disclosure on Iraq under the DPA. So is there sort of 3 questions outstanding with the DoJ at the moment?

Xavier, should you take that?

Yes. Let me try and answer that question. So the breach notice that we received last year has to do with the failure by the company to provide certain information and data. The failure or the breach notice that we have today is in connection specifically with the disclosure that was made to DoJ pre-DPA and decided to follow up with disclosures post DPA. It does not concern any conduct that are violations under the FCPA, post-DPA. So we're not talking about conduct issues, we are talking about failure to adhere to conditions as to disclosure vis-a-vis DoJ.

We will move to the next question. Peter Kurt Nielsen from ABG.

Börje, as you have explained and as you say often, how you have strengthened the company's compliance from since you came in, you've highlighted that often. We also know you have an independent monitor working with you and, I guess, supporting you. Is there anything you can tell us to reassure the market that you have complied with the PDA (sic) [ DPA ] that you are providing the information to the DoJ that you are supposed to do. Is there anything at all you can say to reassure us that, that is the case? And then just secondly, a follow-up. Can you talk about the process from here? How does that progress? Do you have any idea? Is there any -- is it likely we will have clarity before the DPA expires? Or will we have to wait until next year. Any clarity here would be helpful.

We start with the second one. The -- we need to work to be -- or we do cooperate fully with the U.S. authorities. And we have discussions with them. Of course, it is our ambition to try to resolve these things as quickly as possible but there is no timely limit on there so I cannot give you a firm guidance on that. But of course, we are going to do what we can to work with them. There are a number of obligations in the Deferred Prosecution Agreement, including disclosure, and they're very specific. So how we -- and of course, we are committed, and that's why we entered into the DPA to disclose these things. Now we have a breach notice. So we need, of course to make improvements and to change and to adjust that's for sure. So we, of course, are committed to all of the DPAs. So we're not trying to be -- to dismiss that in any way. I think here, it's hard for us to comment more than we have here. And I think we need some time to work with the -- with this matter. We need to work with the U.S. authorities and I guess we will take it from there. So I'm sorry, it's a bit unsatisfactory, but that's where we are. Did I miss one question from -- okay. How we invest in strengthening compliance? I might have missed that question. We -- if we look what we have done, we strengthened -- the compliance program consists of a number of different parts. So it has included how we work with internal controls. What we do to strengthen our processes around that. It also involves how we manage third parties, for example, how we manage used to have a large number of cash transactions, we don't anymore. That was -- that's one important avenue actually to control misbehavior, so you cannot create or you can't use cash or we're very restrictive. Certain markets only allow it, but it's very, very restrictive. We have an element here, which is the culture side. And I think that's where we can put the other parts in place. There are more process oriented, but it's the culture part that actually takes time. And that's on the journey we're on. That includes, of course, involving or integrating integrity in decision-making. That's why we made it a core value of ours last year, and that is something we train our people, we discuss internally and bring that up to the front and center. And the other element of culture is actually speak up. And for me, speak up is critically important in compliance, of course, but actually speak-up is equally important in the regular business. So when you think about what we do on compliance cultural journey, it's no different than what you would like to see in the regular business decision. So think about integrity and decision-making, Yes, that's like looking at facts, it's a good thing to do. And these are things that we're working on. Speak up, if you see the project you're working on has a delay, I'd rather get people to speak up early than not. So they are actually not unique for compliance. They're actually making the whole company a better company. And honestly, I think part of the reason why the company has around and perform differently today is this commitment to compliance because it drives good behavior throughout the company.

We'll move to Alexander Duval in Goldman Sachs.

Just bonded, if you could answer an investor question, which is really the extent to which you see this news having a significant impact on the business you could be awarded in the U.S. or elsewhere by customers. Is there any way to give a perspective on the view of customers here and what drives their decision making? Any help on that would be appreciated.

It's very difficult to assess. It's a good question. We are, of course, going to be committed to our compliance program, and we describe what we are doing in this area. How we are changing as a company. And for example, the behavior here actually dates back to a period many years ago. So we try to describe why we're different now and how it has changed. Of course, it's always that disclosure that you're raising. But I would also add here that -- when we had the announcement in 2019 in December where we showed and committed to a number of misconnected variations as well as corruption. And you can see that on our total numbers, we had very limited impact on our business. I don't want to trivialize the question. I think it is a very serious situation we're in, and we take it very seriously. But we also know that when we discuss with customers, what we're doing, how we're changing, how the company is evolving. It helps us, but I do not want to trivialize the question us.

We will move to the next question, which is from [indiscernible] at DNB.

So first I have a question regarding Vonage deal again, which is basically an investor question that are co-linked, it's about -- given the context of possible extended material fines that you might learn of during the next weeks and months. If you see a need to -- or wish to break up the -- and not move forward with that Vonage agreement, is there a way for you to do that by paying $200 million pre-agreed breakup fee? Or is that breakup possibility just only applicable for regulatory approval, a non-approval situation. That's the question from the investor side.

[ Samir ], you want to take that talk.

Yes, [indiscernible]. [Technical Difficulty] I apologize I have messy [indiscernible]. So the conditions under which the transaction can be broken up with not relate to our ability to pay that it will relate to matters that are to do with the regulatory approvals as such [indiscernible].

Okay. Should I please follow up on an earlier question.

Sure.

[Technical Difficulty] more convinced today that this -- with the customer discussions we're seeing over the past few months, actually, the strategic attractiveness here is very interesting. So we feel that we want to proceed with that transaction, right? Because it actually is going to drive the market in a very different way. But probably, we should schedule a different quarter, maybe on the Capital Markets Day to discuss that more in detail. But I think that's why we're still very committed to the transaction.

Yes, we had a follow-up question right?

Yes. It's -- we can take it later off-line. It's a bad line here.

We'll move to Sandeep Deshpande from JPMorgan.

My question is, I mean, what was disclosed in the press in the past we can disclose to the DoJ before 2019? And the second question I have is actually a follow-up to an earlier one, which is that the -- what DoJ said in October. So are there now 2 cases? Is that what you're saying is that there are 2 ongoing investigations at the DoJ, which are different from each other associated with Ericsson?

If you can start, Xavier.

Yes. So thank you for the question. So in terms of your second question, that is correct We have been informed by DoJ in '21 that they determined that there was a breach with respect to failures to disclose certain information. That has nothing to do with this incident where they again determined that we failed to comply with our disclosure obligations under the DPA and that prior to mention disclosures were I would say, inadequate. So these are 2 different instances and they both relate to our disclosures to DoJ that do not relate to post-DPA breaches of the FCPA. So it's not conduct-related under the FCPA it is failure to comply with the disclosure obligations under the DPA, and those are 2 unrelated instances where DoJ has made those examinations.

I guess [indiscernible].

Sorry, what was the other question, I forget now.

Yes, and any repeat, please?

Yes. My first question was there were some disclosures in the press this past weekend on internal Ericsson document. Were those internal Ericsson documents made available to the DoJ before the DPA was signed in 2019?

We are not in a position where we can comment on what we exactly are disclosing or not disclosing to DoJ. I can only refer to the fact that DoJ has made a decision that the pre-DPA disclosure was insufficient and that we failed to make subsequent disclosures post-DPA.

We have the next question from [ Andreas Jason from Danske Bank ].

Yes. Maybe a follow-up on the last one. I noticed in the press release that you're right that you feel that the internal investigation covered everything that has been brought up by media. Would that mean that you do not agree with DoJ that the information given was insufficient. And the second question, can DoJ, do they have the power to sort of impose other actions than a fine if they should decide to do so? Do they have powers to do anything else? If you understand what I mean?

Sure. So as to your first question, our assessment of whether our investigation covers that has been covered by the media as is independent of what the topic is of what we disclosed, I didn't disclose the DoJ. So these are unrelated questions. I'm sorry, your second question, I apologize, can you repeat again.

DoJ, do they have other actions to take to then decide fine?

Yes. So DoJ has wide discretionary powers, and it would be premature for us to speculate on how they may exercise and what the outcome would be of this particular matter.

We'll move to Stefan Slowinski at BNP Paribas.

Yes. Just 2, I guess, the first one, just on Vonage just trying to understand what you said there. Can you confirm that you have the ability to break that deal for any reason, not just for failure to receive regulatory approval? And then the second one question would be we've spoken about, obviously, the past compliance breaches, but it seems like the new information here from the DoJ is your failure to disclose information before 2019 and after 2019. So I mean, can you talk about what steps you've taken to maybe improve that process around disclosing to the DoJ and sharing information because it seems like that's where the breach is not necessarily what happened from a compliance standpoint pre-2018, for example?

So on the first question, we have only very limited instances pursuant to which the can be broken. And I would refer you to the materials that have been published. I think the agreement is a matter of public record. So rather than trying to go through the details here, we refer you to that. In terms of the breach notice and what we're doing around this, obviously, we have learned. We've done some root cause analysis, and we've taken precautionary measures to make sure that we have a better grip on the information such that we can be more fulsome in our disclosures with DoJ and avoid having future determinations like the one we have been notified of today or yesterday.

Okay. Stefan? Thank you. Thanks. We'll move to the next question, which is [ Tom Sean at Bloomberg ]. [ Tom ], can you hear me?

I just wanted to ask about some of the specific stuff that were named in the press reports, and they say that some of those staff have not left. In fact, some have been promoted as senior positions. Just wondered whether that's still the case and whether that might change and why they might have not left?

So let me start. Following the findings, we have a process to decide on remediation, do their disciplinary measures or process remediation. They are being done in light of the information it has about it at the time. and I do not intend to go into the specifics here of those individuals and the merits of the decisions that were made at the time. We do have a process.

Okay. My other question is, is there any possibility that other regulators other bodies like EU could get involved in this? Or do you see that it's going to be limited to U.S. authorities?

Other [ regulatory ] authorities may decide that they want to look into the same matters as well. As yet, we have not been notified by my knowledge, but of course, that's a possibility.

Thanks, [ Tom ]. We'll move to the last question for this session. And I guess that would be [indiscernible].

Börje, earlier in this presentation, you spoke about a culture of speak up. Why did you choose not to provide the market with any information whatsoever regarding this internal report. It certainly has had a material impact on the company value.

[indiscernible] the Internal report [indiscernible]. And if you look at the taxes for most -- actually do internal investigation is they keep them confidential. There are a number of good reasons for that. But the most important 1 in my mind is actually that we need to protect the identity of the quarters. So anyone that is speaking up, we need to protect their identity because otherwise, we are not going to encourage others to speak up. So my big worry right now is that this might expose individuals, people that actually have spoken up, held out in the investigation and reached those conclusions may deter others in the company to do the same. So here, I am very -- that's why we do not go public every investigation, we think would be exciting the purpose of creating a culture of compliance. So that's the first one. Second one is, as we move along this journey, we actually do a lot of training courses, education with our people and try to kind of encourage the right behavior. That's when we use those cases, but it's much later and in a very different setting than the original report, but we can, therefore, trusting the system by creating the confidentiality around investigation in order to become a better company. So I encourage you to ask other companies how they treat their internal investigations You will find similar cases.

Okay. Just a follow-up. The internal report, which obviously is not public. Nevertheless, you have stated that you have identified possible money flowing to [ ISIS ]. Have you made -- have you reported this possible crime to the Swedish prosecution authorities as per your obligation?

Xavier, I think you're good at answering that.

Yes. Thank you. So we -- I'm not going to comment on our discussions at this point with other enforcement authorities.

So that was the last question. I don't know if you want to have a final remark, Börje, before we close the call.

Thank you all for the questions. I know this is a difficult situation for all of you, but it's equally serious for us. So we take it very seriously. The key here is that -- we are on a journey, a cultural journey to change our culture to strengthen our culture and route out that performance. We're very committed to doing that. And we're going to remain committed to doing that. We believe that the only way Ericsson is going to be long-term successful, combining a culture of technology leadership with compliant behavior is the only way for us for long term succeed. That's a commitment that's very strong. Then of course, it's unfortunate when past events cut shadows over where we are. But that's something we need to confront as well as part of this journey. And that's what we're doing. So you can count on us to investigate, create a speak up culture, create a compliance system that will detect anomalies, investigate them and remediate. And just looking at the numbers for last year, we had about 1,000 allegations. We terminated a little bit less than 100 people. We, and some 20 resigned voluntarily when they realized the results. So when you look at this, it's a fairly big operation that we're going to. We're committing to really making sure that we are at the front and center of compliance. And to comment on the Iraq. I think the reality here is we found this ourselves in 2018 investigated during 2019. There are parts that can be substantiated, and there are parts that cannot be substantiated. And a question on financing arm actions cannot be substantiated or can be substantiated are several breaches of our product business ethics, conflicts of interest, allegations as well as other type of needs conduct that includes, for example, payments of donations where we cannot find the ultimate recipient and there are a number of those. And those are huge embarrassing by itself. So don't get me wrong. They're unacceptable. We cannot do them as a company, and we're going to fix it in the future. Thank you.

Thank you, Börje. And by that, we will close this call. So Mark, please.

Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect.