Dentsu : FY2021 Summary of Questions and Answers（93KB）

Financial Results for the Fiscal Year 2021

Summary of Questions and Answers

Date: February 14, 2022 (Monday)

Hosts:

Hiroshi Igarashi, Director, President & CEO, Dentsu Group Inc.

Yushin Soga, Director, Executive Vice President & CFO, Dentsu Group Inc.

Norihiro Kuretani, Executive Officer, Dentsu Group Inc., and CEO, Dentsu Japan Network

Wendy Clark, Director & Executive Officer, Dentsu Group Inc., and Global CEO, Dentsu International Nick Priday, Director & Executive Officer, D-CFO, Dentsu Group Inc., and CFO, Dentsu International

[FY22 Guidance]

Q: What is the assumption that you built in for the margin of FY22 guidance?

1. DJN achieved an operating margin of 22.9%, far in excess of the 20% margin we committed in our medium-term management plan ("MTMP") in 2021. For FY22, rather than focusing on improving this margin, we will continue to take measures to improve business efficiency, and we will use the profits generated from these measures for medium-tolong-term investments.
   In the Japanese business, too, although we have to focus on structural transformation, M&A is not as active as in overseas markets, so we must transform our business organically through investment into talent, infrastructure, and other areas. By aggressively investing in these areas, we will be able to continue the transformation we are aiming for over the medium term in the fields of CT&T and solutions.
   Therefore, for the Japan business, we issued guidance with an operating margin of 22% in the current fiscal year, but we do not anticipate that it will fall significantly below 22% in the medium term for years onwards. We will continue a gradual improvement from this level and maintain a balance between growth and investment.

With respect to margin guidance for Dentsu International ("DI"), we achieved our medium-term target of 15.0% in 2021 by results in operating margin of 15.9%, which exceeded 90 basis points one year early. This represents a 220 basis point improvement over the previous year and a 370 basis point improvement over 2019. As we now move into 2022, the priority is to deliver stronger growth on a

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sustained basis going forward and we are confident in our ability to sustain the margin in 2022.There are a number of levers which have been behind the margin improvement, property cost and reducing our office footprint has been one feature, and we have been engaged on an accelerated transformation program across the business, which has seen us simplify and re-deduplicate across the Group and has resulted in a structural lowering of our expenses. Despite the fact that these series of reforms were implemented at less cost than anticipated, the effects of the restructuring have begun to appear. Therefore, I am confident in terms of our ability to sustain margin into 2022.

[Structural Transformation]

1. I have a question to Igarashi-san. Has the mindset of employees changed as a result of the structural reforms that were carried out at the time of former Group CEO Mr. Yamamoto? Is expertise for future growth and updating of skills now completed? Are you being able to share your thoughts with employees about future directions from the perspective of top management?

1. During the past two years, under the leadership of the previous CEO, Mr. Yamamoto has implemented structural reforms, including those that were challenging, but that transformation more or less has been completed. In this context, we ourselves realized that we have to transform ourselves, and that had led to great changes in the mindset of our employees. Along with the change of mindset of our people, skill set had to change, re-capability was required and in order to upgrade the skills of our employees, we need to inject even more energy in the upgrading of our skills. We are going to begin to focus on this in this fiscal year. The key strategy is B2B2S, as Dentsu Group is now a big presence in the society that delivers solutions and value that will ensure that the Group's corporate value is firmly recognized by society and that it will firmly recognize its social raison d'etre. I am confident that motivation of employees will increase greatly toward this goal. There is a good proof of improvement in employee engagement scores, and I would like to see further improvement.

[Customer Transformation and Technology ("CT&T")]

1. Is there any capabilities lacking in terms of CT&T at present? Given the fact that the CT&T ratio is lower in Japan business compared to overseas, is my understanding correct that the current priority is to increase CT&T ratio in Japan?

1. The expansion of the CT&T domain is the most important challenge we are addressing today. It is important to commit to all marketing activities of our clients and to provide solid support for digital initiatives. One of the most important area is the design of the client's customer experience, which is

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based on data and analytics. We have been able to lay down the foundation in this area, and the current focus is commerce and digital promotion areas in what we call "CX". These are very important domains for us, for the Japan business, as well as for DI. Therefore, we will consider investment in this area including M&A going forward. In terms of the Japan business, compared to DI, the progress in expansion of CT&T ratio is behind. We are, however, accelerating the pace in DJN. Last year we acquired assets such as Dream Incubator in the consulting domain. Especially in the Japan business, as collaboration with the conventional commerce domain is expected, we think that it will be able to spiral up along with the existing domains mutually, so we think it will achieve a considerable amount of progress by 2024.

In the Japan business, we have already laid the foundation for CT&T area and in terms of functions, there are no missing functions. What we lack is scale. As a background, Dentsu Japan historically regarded communication at every touchpoint between clients and their customers as our business domain. In the past, communication excellence has been aspired, and we have been making headway, and in addition, we provided consulting services such as corporate identity, rebranding, service development, and product development. Against this backdrop, the function of the CT&T field has been well established several years ago. In addition, data-driven PDCA is being driven to keep pace with the recent digitization. As the foundation of this data-driven approach, ISID and Dentsu Digital have been driving growth in this area to serve for the need to add data management platforms to our new services. Again, there is nothing we are lacking in terms of functions in the CT&T's domain, and our challenge is in scale. We need to add resources to enhance the scale of our capabilities.

DI's CT&T currently accounts for one-third of total sales, and its growth will accelerate further towards FY22 and onwards. Our M&A will focus on CT&T capabilities. We have set a medium-tolong-term goal of raising CT&T's total sales ratio up to 50%, and I am confident that this target can be achieved. Since this is the domain in which change is occurring most, we have to continue to invest and sharpen across all of our capabilities in this domain including cloud, technology, MarTech, and digital transformation, which we believe will represent a lot of the future.

[Medium-Term Management Plan ("MTMP")]

1. What is the reason for the upward revision of the organic growth rate target in the MTMP to CAGR 4-5% by 2024? Is it because of recovery in the advertising market recovered more than you had expected, or potential growth in CT&T is stronger than you expected, or is digitalization under the COVID19 environment providing a tailwind and you are seeing potential from new growth minerals? I would like you to explain the background for upgrading the guidance.

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1. The main reason for the upward revision of the organic growth rate targets in the MTMP is the recovery in the advertising market, and we expect a larger recovery than initially assumed. Although there have been global supply chain issues, we think the recovery trend is strong.
   Furthermore, in the field of CT&T, our clients are continuing their significant investment in that area, and we are strongly committed to supporting them. We also see behavioral change of consumers, and digitalization is another factor that's creating this tailwind, especially in the area of commerce. We are investing, in this domain and it is well-aligned with the behavioral changes in the consumers.

I am confident about DI based on multiple factors. The return to growth has come from a cyclical benefit, but it will now also start to come from the structural benefit of CXM. CXM grew by 14.7% in Q4, achieving a growth rate of 6% compared to 2019. In FY21, all three service lines achieved strong performance, and 4,000 new business wins were acquired. Eighty-three of the top 100 clients have contractual relationships with two or more service lines. Client satisfaction has risen and employee engagement has been at the highest level in the past four years. We have also invested in talent development. In addition, the full range of proof, including M&A commitments and cost-basis reductions as a result of restructuring, allows DI to achieve an organic growth rate of 4% to 5% in FY22 with confidence.

1. Is DI's organic growth target in the Medium term management plan higher or lower than the consolidated target set at CAGR 4 to 5% by 2024? What is the growth rate by service line for Media, Creative and CXM?

1. I am confident of the goals of the MTMP. We will continue to lead the transformation and integrate the three service lines across the Group. We are becoming more confident with solid results in Q4. It was a resilient performance, and Creative was good. We are increasingly confident about CXM, and I think we can achieve double-digit growth in the medium term. We also invest in this area. Media will continue to be affected by the economy, but it is still an important business, and it can also differentiate itself from consultancy companies. We think all three service line positions are good in the medium term.

[M&A]

1. What are the types, sizes and multiples of M&A targets you are looking for?

1. As areas of focus, we will focus on investments in the CT&T Group, as well as in priority markets, including Japan and North America. In terms of the terms of the deal, CT&T is now a very expensive

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market, but I think it will be a deal with an EBITDA ratio of between 15 and 20, for example. Regarding M&A going forward, rather than engaging in numerous M&A in many markets, the Company plans to buy larger businesses than previously in markets that are important to our group. Until now, the Company has conducted a number of M&As in the range of 2 billion yen to 3 billion yen, but in the future, it intends to carefully select M&As that are over 10 billion yen. I recognize that it is a very important agenda to integrate these businesses in a relatively short period of time and integrate it into the group after carefully selecting and implementing M&A.

In terms of overseas M&A, within CT&T, the company will focus on the commerce and digital transformation businesses. Previous acquisitions, mostly small and medium-sized,revolt-on-type deals, were valued at $25 million, but will be large and small in number in the future. The sweet spot ranges from $50 million to $150 million. But I think APAC's mergers and acquisitions in the CT&T arena will be a little smaller than this size.

[Share Buyback]

1. What are the conditions for buying back shares? Is it according to the total return ratio or the amount of surplus funds? What is the background to the implementation of the program last year and this time?

1. Upon upgrading the MTMP, we forecasted the medium-term funding position as a business plan up to 2024, taking into account earnings growth and funds for investments for business transformation, including M&A. At the same time, I'm also thinking about additional shareholder returns when I make a big asset sale. Multiplying these two, we decided it was appropriate to conduct a share buyback as an additional shareholder return. At the end of 2021, our balance sheet was very healthy, robust, and ended with a net cash position. Based on this assumption, we decided on this share buyback after considering the medium-term funding plan and funding demand.

1. If the business for the mid-tolong-term term progresses according to the company's expectations, and should M&A be conducted as planned, should the likelihood of additional share buybacks be considered low by 2024? Share buyback is announced by 40 billion yen this time, but has this left room for further buybacks by 2021?

1. I do not deny the possibility of future share buyback. Not leaving room when you look at other conditions, including cash flow. Over the years up to 2024, business growth will increase operating cash flow. We plan to increase shareholder returns through dividends by increasing the dividend payout ratio and then growing revenues. At the same time, we have outlined our allocated M&A fund of 250

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