Dentsu : FY2020 H1 Results

FY2020 H1 Results

August 13, 2020

Yushin Soga

DENTSU GROUP INC.

Director and CFO

• Please be reminded that the figures shown in this presentation may be different from those shown in the financial statements as this presentation has been prepared for investors to understand our businesses. Please refer to the annotations in the Appendices for each definition of the indicators.

Key Points

• Group responding to COVID-19 pandemic
• • Tracking ahead of the planned 7% cost reduction against budgeted FY2020 consolidated cost base
  • Planning for slow recovery H2 FY2020 onwards; focus remains on digital solutions opportunity
• Comprehensive review and accelerated transformation plan announced
• • Review will simplify the business and structurally lower operating expenses
  • Enhance efficiency of Group balance sheet and maximize long-term shareholder value
• Dentsu Group organic revenue decline H1 FY2020 -8.9%
• • Japan: organic revenue decline H1 FY2020 -4.6%. Double digit organic growth in digital solutions
  • International: organic revenue decline H1 FY2020 -12%
• Dentsu Group operating margin H1 FY2020 12.9%, +270bps yoy
• • Japan: -10bps yoy, continued focus on reducing operating expenses despite top line pressure
  • International: +400bps, continued focus on reducing operating expenses and benefits from planned cost reductions announced in Dec. 2019

1

Summary				(JPY mn)
		2020	2019		Constant
		YoY %	currency
		Jan-Jun	Jan-Jun
			basis %
	Turnover	2,126,847	2,478,700	(14.2)	-
	Revenue	459,082	497,068	(7.6)	-
	Revenue less cost of sales	408,868	449,242	(9.0)	(6.9)
	Digital domain ratio	52.7%	48.9%	+3.8	+3.6
	International business ratio	56.4%	58.5%	(2.1)	(1.2)
	Underlying operating profit	52,747	46,007	+14.6	+14.7
	Operating margin	12.9%	10.2%	+2.7	+2.4
	Underlying net profit	28,304	23,498	+20.5	-
	Underlying basic EPS	102.01 yen	83.35 yen
	Operating profit	28,745	19,086	+50.6	-
	Net profit (loss)	15,795	(641)	-	-
	EBITDA	73,167	64,659	+13.2	-

*Net profit, underlying net profit and underlying basic EPS: Excluding attribution to non-controlling interests *The numbers for Jan-June 2019 are after bonus equalization unless otherwise stated.

2

Movement of Revenue less cost of sales

(JPY)

449.2 bn

-10.0 bn

+9.4 bn

-39.8 bn

Organic growth

-8.9%

408.8 bn

3

Analysis of Underlying Operating Profit

(JPY)

Operating expenses: selling, general & administrative expenses, other income and other expenses

4

Japan Business

				(JPY mn)
	2020	2019	YoY %	Organic
	Jan-Jun	Jan-Jun	growth %
DENTSU Inc.	99,562	109,252	(8.9)	(8.9)
ISID	19,163	16,232	+18.1	+18.1
Dentsu Digital	11,067	9,743	+13.6	+13.6
Dentsu Regional entities	9,162	11,258	(18.6)	(18.6)
CARTA HOLDINGS	9,909	9,923	(0.1)	(0.1)
Dentsu Tec	6,749	7,082	(4.7)	(4.7)
Dentsu Live	5,969	4,958	+20.4	+20.4
Other / Aujustments	16,679	18,046	(7.6)	-
Revenue less cost of sales	178,260	186,494	(4.4)	(4.6)
Digital domain ratio(%)	32.2	28.5
Underlying operating profit	38,078	40,108	(5.1)
Operating margin	21.4%	21.5%	(0.1)

*Revenue less cost of sales figures of each company are based on IFRS.

*Underlying operating profit and Operating margin for the January-June period of 2019 was restated with excluding central costs following to establishment of the holding company in January 2020.

*Dentsu regional entities is consist of four wholly owned subsidiaries: Dentsu East Japan Inc., Dentsu West Japan Inc., Dentsu Kyushu Inc., and Dentsu Hokkaido Inc.

5

Dentsu Aegis Network - International

						(JPY mn)
		2020	2019	YoY %	Constant	Organic
		currency	growth
		Jan-Jun	Jan-Jun
			basis %	%
	EMEA	84,394	98,227	(14.1)	(10.1)	(10.7)
	Americas	107,709	113,566	(5.2)	(2.4)	(8.3)
	APAC	38,448	51,115	(24.8)	(21.0)	(23.1)
	Revenue less cost of sales total	230,547	262,909	(12.3)	(8.8)	(12.0)
	Digital domain ratio	68.5%	63.3%	+5.2	+4.3
	Underlying operating profit (loss)	17,540	9,365	+87.3	+86.9
	Operating margin	7.6%	3.6%	+4.0	+3.9
	Media					(15.7)
	Creative					(14.9)
	CRM					(3.0)

6

Reconciliation from Underlying OP to Statutory OP

			(JPY mn)
	2020	2019	YoY #	YoY %
	Jan-Jun	Jan-Jun
Underlying operating profit	52,747	46,007	+ 6,739	+14.6
Adjustment items	(24,001)	(26,921)	+ 2,919
Amortization of purchased intangible assets	(15,839)	(17,935)	+ 2,095
Acquisition costs	(699)	(654)	(45)
Share-based compensation expenses related to acquired	(3,086)	(3,850)	+ 764
companies
Share-based compensation expenses issued following the	(369)	-	(369)
acquisition of 100% ownership of a subsidiary
One-off items	(4,008)	(4,482)	+ 474
Business restructuring costs	(1,823)	-	(1,823)
Impairment losses	(1,686)	-	(1,686)
Others	(499)	(4,482)	+ 3,983
Operating profit	28,745	19,086	+ 9,659	+50.6

7

Statutory Operating Profit to Net Profit

				(JPY mn)
	2020	2019	YoY #	YoY %
	Jan-Jun	Jan-Jun
Operating profit	28,745	19,086	+ 9,659	+50.6
Share of results of associates and others	(371)	(168)	(203)	-
Profit before interest and tax	28,375	18,917	+ 9,458	+50.0
Net finance income (costs)	3,755	(15,213)	+ 18,969	-
Finance income	15,048	4,912	+ 10,136	+206.4
Finance costs	11,293	20,126	(8,832)	(43.9)
Profit before tax	32,130	3,703	+ 28,427	+767.7
Income tax expense	12,445	1,487	+ 10,957	+736.9
Net profit	19,685	2,215	+ 17,470	+788.7
Attributable to owners of the parent	15,795	(641)	+ 16,436	-
Attributable to non-controlling interests	3,890	2,856	+ 1,033	+36.2

8

Cash Flow

				(JPY mn)
		2020	2019	Y o Y #
		Jan-Jun	Jan-Jun
	Underlying operating profit	52,747	44,997	+ 7,750
	Business restructuring cost spend	(6,283)	-	(6,283)
	Non-cash items Adjustments(*1)	17,767	11,405	+ 6,362
	Cash flows from operating activities before adjusting	64,233	56,403	+ 7,830
	changes in working capital and others(*1)
	Change in working capital	(64,635)	(62,314)	(2,321)
	Cash flows from operations(*1)	(403)	(5,911)	+ 5,508
	Net Interest (paid)	(8,001)	(7,408)	(593)
	Dividends received	2,006	2,094	(88)
	Income taxes paid	(15,187)	(44,145)	+ 28,958
	Net cash flows from operating activities(*1)	(21,584)	(55,370)	+ 33,786

*The numbers for Jan-Jun 2019 are before bonus equalization. (*1) Excluding depreciation adjustments under IFRS 16

9

Cash Flow

			(JPY mn)
	2020	2019	Y o Y #
	Jan-Jun	Jan-Jun
Net cash flows from operating activities(*1)	(21,584)	(55,370)	+ 33,786
Capital spend	(9,795)	(14,121)	+ 4,326
Acquisitions and disposals	(8,655)	(10,249)	+ 1,594
Purchase/sale of interests in subs	(9,363)	(833)	(8,530)
Purchase/sale of securities	(4,416)	(13,676)	+ 9,260
Other investing activities	(780)	(1,350)	+ 570
Other financing activities(*2)	(611)	(1,729)	+ 1,118
Gross cash flow	(55,204)	(97,328)	+ 42,124
Dividends paid	(14,783)	(13,818)	(965)
Share buybacks	(10,001)	(5)	(9,996)
Exchange rate movements	11,692	4,440	+ 7,252
Change in net debt	(68,296)	(106,711)	+ 38,415

(*1) Excluding depreciation adjustments under IFRS 16

(*2) Excluding payment of lease obligations under IFRS 16

10

Net Debt

			(JPY mn)
	2020	2019	Var. #
	End of Jun	End of Dec
Total debt	700,813	623,927	+ 76,886
Cash and cash equivalents	422,644	414,055	+ 8,589
Net debt	278,168	209,872	+ 68,296
EBITDA (LTM)	168,112	160,280	+ 7,832
Net debt / EBITDA (LTM)	1.65	1.31
Net debt (LTM average) / EBITDA (LTM)	1.71	1.53

The above Total debt is sum of loans and bonds. Lease obligation (JPY 115,133 mn as of June 30, 2020 JPY 133,063 mn as of December 31, 2019) is not included LTM average: Average of latest twelve months

LTM: Latest twelve months

The numbers for 2019 are before bonus equalization

11

Conclusions:

• Comprehensive review and accelerated transformation plan announced
• • Focus on long term structural growth opportunities - particularly in digital solutions and CRM
  • Review will simplify the business and structurally lower operating expenses
  • Enhance efficiency of Group balance sheet and maximize long-term shareholder value
• Interim dividend per share confirmed at 47.5 yen
• • Review will look at balance sheet and capital efficiency, including dividend policy
  • Review is aimed at improving long-term shareholder returns
  • Delivering a stable, progressive dividend will be a key part of the review's objectives
• Guidance: Remains withdrawn for FY2020
• • Expect H2 FY2020 to show modest improvement in the rate of organic revenue decline versus the second quarter
  • Q2 FY2020 is still expected to have been the weakest quarter
  • Decline in revenue will exceed the running rate of cost savings in the second half of FY2020

12

Disclaimer

Forward-Looking Statements

This presentation contains statements about Dentsu Group that are or may be forward-looking statements. All statements other than statements of historical facts included in this presentation may be forward-looking statements. Without limitation, any statements preceded or followed by or that include the words "targets", "plans", "believes", "expects", "aims", "intends", "will", "may", "anticipates", "estimates", "projects" or, words or terms of similar substance or the negative thereof, are forward-looking statements. Forward-looking statements include statements relating to the following: information on future capital expenditures, expenses, revenues, earnings, synergies, economic performance, and future prospects.

Such forward-looking statements involve risks and uncertainties that could significantly affect expected results and are based on certain key assumptions. Many factors could cause actual results to differ materially from those projected or implied in any forward-looking statements. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof.

Risks, uncertainties or other factors that could cause actual results to differ materially from those expressed in any forward-looking statement include, without limitation

• Risk related to fluctuations in the economic and business environment
• Risk related to structural changes in the media

• Risk related to our ability to realize our financial targets ⅳ Risk related to common business practices
  ⅴ Risk related to competition among advertising agencies ⅵ Risk related to the development of systems and databases ⅶ Risk related to legal or regulatory changes
  ⅷ Risk of litigation
  Dentsu Group disclaims any obligation to update any forward-looking or other statements contained herein, except as required by applicable law.

IFRS15 "Revenue from Contracts with Customers":

IFRS15 "Revenue from Contracts with Customers" is applied from January 1st, 2018.

In this presentation file, IFRS15 is also applied to the past years and presented as pro forma information.

IFRS16 "Leases":

IFRS16 "Leases" is applied from January 1st, 2019. The cumulative effect of initially applying IFRS 16 is recognized at the date of initial application (modified retrospective approach). Past results are not restated under IFRS 16.

13

Appendices

14

Definition

	Turnover:	The gross amounts billable to clients handled by the Group on behalf of clients, with net of discounts, VAT and other
		sales-related taxes
	Underlying operating profit:	KPI to measure recurring business performance which is calculated as operating profit added with M&A related items and
		one-off items
		M&A related items: amortization of purchased intangible assets, acquisition costs, share-based compensation expenses
		related to acquired companies, share-based compensation expense issued following the acquisition
		of 100% ownership of a subsidiary
		One-off items: items such as impairment loss and gain/loss on sales of non-current assets
	Operating margin:	Underlying operating profit divided by Revenue less cost of sales

• Underlying net profit (attributable to owners of the parent):

		KPI to measure recurring net profit attributable to owners of the parent which is calculated as net profit (attributable to
		owners of the parent) added with adjustment items related to operating profit, gain/loss on sales of shares of associates,
		revaluation of earnout liabilities / M&A related put-option liabilities, tax-related, NCI profit-related and other one-off
		items
	Underlying basic EPS:	EPS based on underlying net profit (attributable to owners of the parent)
	EBITDA:	Operating profit before depreciation, amortization and impairment losses
	Constant currency basis:	Comparison with the current period where the previous year's numbers are recalculated using the currency
		exchange rate which is used for the current year's numbers
	Currency:	Currency movements comparing prior period reported revenue less cost of sales at reported currency to prior
		period revenue less cost of sales at constant currency (reported currency of the current year)
	Acquisitions:	The effect of business acquired or disposed of since the beginning of the prior year
	Organic growth/	Organic growth and organic revenue decline represent the constant currency year-on-year growth/decline after adjusting
	Organic revenue decline:	for the effect of business acquired or disposed of since the beginning of the prior year. This is calculated by comparing
		current period reported revenue less cost of sales to prior period revenue less cost of sales, adjusted for the pre-
		acquisition or pre-disposal revenue less cost of sales as applicable, and stated at constant exchange rate, in order to	15
		derive like-for-like growth

Quarterly Results

(JPY mn)

2020 YoY % 2020 YoY %

Apr-JunJan-Mar

Turnover	932,415	(26.2)	1,194,431	(1.7)
Revenue	206,344	(16.3)	252,737	+0.9
Revenue less cost of sales	181,697	(17.9)	227,170	(0.4)
Japan	74,544	(12.2)	103,715	+2.1
International	107,337	(21.3)	123,210	(2.6)
Underlying operating profit	15,509	(15.7)	37,237	+34.9
Japan	7,773	(26.6)	30,304	+2.7
International	8,884	(7.0)	8,655	-
Central costs and eliminations	(1,148)	-	(1,722)	-
Operating margin	8.5%	+0.2	16.4%	+4.3
Japan	10.4%	(2.0)	29.2%	+0.3
International	8.3%	+1.3	7.0%	+7.1
Underlying net profit	7,945	(11.5)	20,358	+40.3
Operating profit	4,051	(39.2)	24,694	+98.8
Net profit	438	-	15,356	-
EBITDA	24,916	(15.0)	48,251	+36.6

Net profit, underlying net profit: Excluding attribution to non-controlling interests

16

Quarterly Organic Growth

			(%)			(%)			(%)
	Dentsu consolidated total		Japan		International total
	2020	2019	2018	2020	2019	2018	2020	2019	2018
Jan-Mar	(0.8)	(1.6)	+2.1	+2.1	(2.7)	+1.9	(3.3)	(0.7)	+2.2
Apr-Jun	(17.3)	(1.3)	+5.9	(12.6)	(1.4)	+8.4	(20.0)	(1.3)	+4.5
Jul-Sep	-	(0.1)	+5.4	-	+1.7	+2.7	-	(1.0)	+7.0
Oct-Dec	-	(1.1)	+0.9	-	+4.0	(3.0)	-	(4.0)	+3.4

	International - EMEA	International - Americas	International - APAC
	2020	2019	2018	2020	2019	2018	2020	2019	2018
Jan-Mar	(0.4)	(0.4)	+2.7	+1.2	+0.1	+4.6	(19.5)	(3.0)	(2.9)
Apr-Jun	(20.2)	+0.7	+4.8	(17.1)	+2.8	+6.5	(26.4)	(12.3)	+0.8
Jul-Sep	-	(1.0)	+8.2	-	+5.0	+5.3	-	(12.3)	+8.2
Oct-Dec	-	(1.8)	+12.0	-	+1.5	+3.5	-	(17.9)	(9.6)

17

Organic Growth of Major Markets

2020 Jan-Jun Organic Growth %	Markets

"0% or more"

"-10% or more" to "less than 0%" "-20% or more" to "less than -10%"

"More than -20%"

Germany, Russia, Switzerland

Denmark, Italy, Japan, Sweden, USA

Norway, Poland, Taiwan, UK

Australia, Brazil, Canada, China, France, India, Netherlands, Spain, Thailand

18

Change in Underlying Operating Margin

19

Operating Margin

20

Reconciliation from Underlying NP to Statutory NP

				(JPY mn)
	2020	2019	YoY #	YoY %
	Jan-Jun	Jan-Jun
Underlying net profit	28,304	23,498	+ 4,806	+20.5
Adjustment items	(12,509)	(24,139)	+ 11,630
Operating profit adjustments	(24,001)	(26,921)	+ 2,919
Gain(Loss) on revaluation of earnout liabilities	+ 10,521	(8,069)	+ 18,590
and M&A related put-option liabilities
Impairment loss of associates	(436)	-	(436)
Gain on sales of shares of associates	+ 5	-	+ 5
Revaluation gain on step acquisition	+ 44	-	+ 44
Related income tax expense	+ 960	+ 9,138	(8,178)
Adjustments attributable to non-controlling interests	+ 397	+ 1,713	(1,315)
Net profit (loss)	15,795	(641)	+ 16,436	-

Operating profit adjustments: Please refer to "Reconciliation from Underlying OP to Statutory OP"

Underlying net profit and net profit: Excluding attribution to non-controlling interests

21

Financial Position

				(JPY mn)
	2020	2019	Var. #	Var. %
	End of Jun	End of Dec
Goodwill	721,245	754,796	(33,551)	(4.4)
Intengibles	224,767	245,517	(20,750)	(8.5)
PPE (net of lease liabilities)	177,404	182,053	(4,649)	(2.6)
Equity instruments	332,802	381,737	(48,935)	(12.8)
Net working capital	(1,177)	(51,633)	+ 50,456	(97.7)
Net debt	(278,168)	(209,872)	(68,296)	+32.5
M&A related debt	(188,041)	(208,958)	+ 20,917	(10.0)
Others	(22,257)	(41,106)	+ 18,850	(45.9)
Net assets	966,575	1,052,533	(85,958)	(8.2)
Owners' interests	909,847	974,977	(65,130)	(6.7)
Non-controlling interests	56,728	77,556	(20,828)	(26.9)
JPY/USD	107.7 yen	109.6 yen	-	(1.7)
JPY/GBP	132.5 yen	143.5 yen	-	(7.6)

22

Turnover of Japan Business by Business Category (IFRS basis)

							(JPY mn)
	2020	YoY %	2020	YoY %	2020	YoY %
	Jan-Jun	Apr-June		Jan-Mar
Newspapers	30,236	(21.2)	11,447	(23.6)	18,788	(19.6)
Magazines	7,029	(23.2)	2,726	(35.1)	4,302	(13.2)
Radio	6,576	(10.1)	2,922	(15.6)	3,653	(5.1)
Television	300,461	(11.9)	130,368	(21.6)	170,093	(2.8)
Internet*1	115,238	(4.9)	49,377	(7.7)	65,861	(2.7)
OOH Media	21,728	(19.5)	7,627	(41.2)	14,100	+0.5
Creative	89,208	(14.9)	31,785	(34.4)	57,423	+1.8
Marketing/Promotion	155,474	+23.8	76,308	+20.0	79,165	+27.8
Content Services (Japan GAAP)*2	121,864	(1.8)	20,947	(27.1)	100,916	+5.9
Others	72,684	(2.4)	34,310	(6.3)	38,373	+1.3
Consolidation adjustments and others*3	(36,156)	-	16,838	-	(52,995)	-
Internet included in mass media*4	(3,225)	-	(1,198)	-	(2,027)	-
Total	881,120	(6.4)	383,463	(14.4)	497,657	+0.9

*1 The aggregate of Internet (previous calculation) and Internet turnover which is included in mass media (2020 Jan to June: JPY 3,225 mn)

*2 There is a difference in revenue recognition timing between IFRS and Japan GAAP. Japan GAAP is used for Content Services in the table. The difference between IFRS and Japan GAAP is recorded in "Consolidation adjustments and others."

*3 Turnover to group companies in International business, GAAP difference and others are included.

*4 Amounts included in both "Internet" and mass media.

23

Japan Business Digital Domain (IFRS basis)

		(JPY mn)
	2020	YoY %
	Jan-Jun
Digital domain turnover	198,608	+0.1
Digital domain revenue less cost of sales	57,436	+8.1
Digital domain revenue less cost of sales:
Digital domain ratio in Japan business*1	32.2%	+3.7

*1 Digital domain: Internet and data related marketing service, and development and sales of IT system

24

Net Sales (Turnover) of Dentsu Inc. by Industry (J-GAAP)

									(JPY mn)
	2020	YoY %		Apr-Jun	YoY %		Jan-Mar	YoY %
		Jan-Jun
Information/Communications	92,919	(7.1)	27,904	(29.9)	65,014	+7.9
Government/Organizations	87,314	+99.9	53,936	+123.3	33,378	+71.0
Finance/Insurance	71,243	(14.8)	22,951	(28.7)	48,292	(6.1)
Beverages/Cigarettes	64,566	(17.0)	29,292	(24.7)	35,274	(9.3)
Cosmetics/Toiletries	53,109	(19.4)	27,980	(25.8)	25,129	(10.8)
Food Services/Other Services	49,122	+1.7	14,309	(30.0)	34,813	+24.9
Foodstuffs	48,797	(14.1)	20,731	(23.6)	28,066	(5.4)
Transportation/Leisure	36,319	(10.9)	10,764	(31.6)	25,554	+2.1
Automobiles/Related Products	34,741	(13.0)	10,530	(29.1)	24,211	(3.5)
Real Estate/Housing Facilities	31,759	(6.4)	8,176	(27.9)	23,582	+4.4
Distribution/Retailing	29,481	(17.3)	12,598	(30.0)	16,882	(4.2)
Pharmaceuticals/Medical Supplies	28,464	(10.9)	13,059	(14.9)	15,404	(7.1)
Energy/Materials/Machinery	22,034	+6.3	5,834	(14.7)	16,200	+16.6
Home Electric Appliances/AV Equipment	17,755	+3.3	4,843	(19.9)	12,912	+15.8
Apparel/Fashion, Accessories/Personal Items	17,461	+3.4	7,079	(2.5)	10,381	+7.8
Others	58,721	(15.9)	22,742	(19.8)	35,978	(13.2)
Total		743,814	(5.0)		292,736	(14.9)		451,077	+2.8

25

Currency Exchange Rates Information

Average rate

Period end rate

2020

2019

Var. %

2020

2019

Var. %

Jan-June

Jan-June

End of June

End of December

JPY/USD

108.3 yen

110.0 yen

(1.6)

107.7 yen

109.6 yen

(1.7)

JPY/EUR

119.3 yen

124.3 yen

(4.0)

121.1 yen

122.5 yen

(1.2)

JPY/CNY

15.4 yen

16.2 yen

(5.0)

15.2 yen

15.7 yen

(2.8)

JPY/GBP

136.6 yen

142.4 yen

(4.1)

132.5 yen

143.5 yen

(7.6)

JPY/AUD

71.2 yen

77.7 yen

(8.4)

73.9 yen

76.5 yen

(3.5)

Revenue less cost of sales ratio by currency

(%)

JPY

USD

EUR

GBP

CNY

AUD

Others

Total

2020 Jan-Jun

43.6

23.7

8.6

5.3

2.6

1.9

14.3

100.0

26