Dentsu : H1 FY2022 Questions and Answers（125KB）

Dentsu Group Financial Results for H1 of Fiscal 2022

Questions and Answers

Date: August 12, 2022 (Friday)

Hosts:

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

Yushin Soga, Representative 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 CEO, Dentsu International Nick Priday, Director & Executive Officer, D-CFO, Dentsu Group Inc. and CFO, Dentsu International

Question 1: First of all, on the M&A pipeline, you just completed two very recently. Can you tell us a bit more, please, about the size of your likely acquisitions, and pricing environment, and the competitive?

My second question is to get more detail on the near and the offshoring, which is really interesting. The scale that you would want it to be? And is there potential for further moves on that front? Thank you.

Igarashi: In regard to your first question, M&A pipeline and scale, and also the pricing environment. I'll ask Nick to respond.

Priday: Our M&A pipeline does remain very active. We are looking at a number of deals. Those deals are pretty scaled generally. We want to make sure we do a smaller number of larger deals than to international itself had done historically to make a more strategic impact on our business.

The three deals we've done on a year-to-date basis really demonstrate our commitment to reach 50% of revenues from customer transformation and technology going forward because that's where we see the structural growth in our industry.

Pricing is always competitive for these types of assets. They're scarce assets, which are in high demand. I would say that pricing was pretty high six months ago. It's come down a little bit, which does provide an opportunity, but we also always need to make sure that we diligence acquisitions appropriately and don't overpay. But we obviously have an industrialized process. We're very used to doing acquisitions, and we will continue to do so to add the capability to our business and grow value for shareholders on a go-forward basis.

So hopefully that answers your question. Thank you.

Igarashi: Thank you. In regard to the nearshore-offshore question, please allow me to respond. Then I will ask Wendy to follow me up if required. Thank you very much for your attention in this area. Now, in regard to nearshore and offshore capability, we are considering achieving scale here to be very important right now. As explained in terms of the number of employees, 12.5% of our employees through this nearshore and offshore capability. So, whether it be nearshore or offshore capability, based on various needs, based on our area strategy, as well as to provide efficient service, we certainly have been able to achieve a lot of contribution in that regard.

And so, this, the main, is an area with a great expectation from our clients and with our ability to provide solution going forward, and also will contribute towards providing efficient service. So, in that regard, we intend to enhance our initiatives in this area.

In regard to a more concrete direction, I'd like to ask Wendy to follow.

Clark: Thank you. I think it's actually a question we are talking to our clients increasingly about. Certainly, as there are increased cost pressures in our business, making sure we've got the diversity of capability around the world is crucial for us to have commercial viability and also access to key talent. We do have 7,500 employees right now in about 18 delivery centers. The bulk of those is in India. So over two-thirds of those sit in India. And we have line of sight to that number being 10,000 by the end of the year.

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I think what's particularly advantageous for us and competitive advantage is that, versus our agency peers, who are in low single digits, you can see that we're now at 17% of our staff at Dentsu Interntaional in near and offshore locations. So, you can see that this really becomes quite a differentiator for us. And certainly, in a period where cost becomes more of a focus with our clients, we see a tremendous competitive advantage. Thank you.

Priday: This is Nick speaking. Just to add a little bit in respect of our functional delivery. It's not just the client work that we can really benefit from our offshore and nearshore capabilities. We do have delivery centers also focus on delivering core competencies across the business functions, across HR, finance, et cetera, allowing us to really make sure we do things the same way once in a consistent manner at scale. So, creating more standardized processes across the business.

Obviously, that gives us much better transparency and much better control. We use KPIs and scorecards a lot to really help with our margin improvement initiatives, really focusing on the cost- to-serve ratio across our business functions and making sure that's fit for purpose doing the quality service at an appropriate cost.

And so, I just wanted to add to that because I think we look at the offshore delivery centers has been very important to make sure we're competitive in terms of pricing for clients, making sure we're efficient, but also helps with a functional agenda as well. Thank you.

Question 2: I will put three of my questions at once. The market remains quite uncertain. In H2, Q3, and Q4, in and outside of Japan, what is the trend of the advertising market that you foresee, and subtraction will give us a target for Japanese clients in Japan for H2 of the year. But what is your outlook inside and outside of Japan with regards to client trends in H2?

The next question is on CT&T. It is growing, but particularly, in what area are you seeing group results? ISID is growing. So, I believe that means you have stronger growth in securities business- related clients, but could you elaborate on this point?

The third question, in H1, when we look at regional growth and looking at disclosure of information of other global agencies, it seems that there may be some weakness in some areas, according to Publicis, whereas you have a net win, there are some data that actually shows that there were net losses, including wins and losses, could you discuss the trend?

Igarashi: First, this is Igarashi. I would like to respond to your first question. In the uncertainties in the advertising market and outlook for Q3 and Q4 in Japan and outside of Japan, I would like to discuss the overall outlook, and I would like to ask Kuretani-san and Wendy-san to follow up on the Japanese market and the international market, respectively.

As I mentioned in my presentation, there are uncertainties in macroeconomic trends in H2, as you rightly mentioned. However, this time, we are fully incorporating these uncertainties in our forecast numbers. And so, our guidance, if I may repeat, we believe our target, that we are able to achieve a high probability, and we have been implementing a series of initiatives, and we are confident that we are able to achieve the guided figures.

Now I would like to ask Kuretani-san to follow me up on the Japanese market.

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Kuretani: First, regarding the advertisement business, in this area as well, we cannot deny that there still remains an uncertainty. However, even despite the seventh wave of the COVID infection spike, there are no restrictions on movement, restaurant, leisure, industry, people dispatched, and wealth segment, there are strong activities. And we believe we see strong trends.

In the last year, in Q3, because of the onetime event of Olympics and Paralympics, we are against a tough comparable, but we believe, even in view of that, we are confident of achieving our guided numbers.

As for the win rate for H1 with our pitch, as usual, we have been able to maintain a high win rate. As for H2 of the year, regarding one-time events, there is World Cup Soccer As of February, there was a possibility that Japan may not be able to appear in the World Cup. But since then, Japan indeed won the slot in the World Cup. In comparison to the World Cup, there is a world of events and table tennis, and variable Grand Prix series. These one-time sports events, although smaller in size in comparison to the World Cup, are also scheduled in H2 of the year.

As Japan business, we expect to achieve the guidance for advertisement business. As for CT&T, in H1, as you pointed out, ISID was very strong. And in other businesses, including in the business design area and in the customer experience area, we have seen double-digit growth across the board. Combined, over 15% of growth was achieved, and we believe that momentum will continue into H2 of the year.

Wendy, could you discuss the advertisement market and also the CT&T trend in international markets?

Clark: To Igarashi-san's opening comments, we are very close to our clients. That's one of our strengths. And so, having those constant conversations and check-ins really, deeply understanding their business, and understanding their categories, and their consumers, and how they will win is part of our recipe for success.

As you know, from our earnings already, we have given guidance that will now be at the upper end of our guidance for Dentsu International, that's the 5% to 6% range. So, we're saying we're going to be at the upper end of that. That does include any potential drag from Russia that continues, which represented about 1.5 percentage points in Q2, and any potential inflationary impacts. All of that is factored into that guidance.

As to the win rate, we've had about USD1 billion in media wins so far in Dentsu International this year. We have a very strong local conversion rate, and we've seen that now convert to regional and super regional wins by the likes of Ferrero, ING, and UniCredit. And of course, what's never reported in those numbers would be expansions with existing clients, where, again, back to our closeness with clients is a real strength for us.

So, our top 20 clients grew 12% in Q2. That's not going to show up necessarily in any public statements of wins and losses because they're already clients for us, but the likes of Heineken and P&G among them. And so finally, sort of in that consideration and bridging them to the CXM endpoint, media represents 50% of our business, but of course, the other 50% is in CXM and creative. CXM is now 36% of our revenue, so over one-third in that important structural growth area, less cyclical, and more resilient during any potential challenging times. They are in their fifth quarter of double-

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digit growth, and they're up now 18% over pre-pandemic performance. So exactly in line with what we would like to see specifically within CXM, the growth areas.

Commerce and experience are up 20%. B2B is up 30%, and our analytics business is up over 20%. So just to give you a further breakdown of where we see the true expansion. Thank you.

Question 3: Good morning, everybody. Thank you for taking my question. The first one is on CT&T, 32.3% of your revenue, but how much of your revenue within that is the product rather than services, i.e., software solutions for clients, and how much of your revenue is recurring because you mentioned that in your speech, but if we could have some idea of how big that is?

That's my first question. And for both Japan and international or for Dentsu as a whole?

And then the second question is for Wendy. I saw you were going from a lot to nine brands, but now you have merged all creative agency to Dentsu Creative. So how many brands do you have left at International? What are they, and what do they do? Thank you

Igarashi: First, in regard to the CT&T, the revenue breakdown between product and software, and the recurring, situation for both in Japan and for International. And so, for Japan, I will ask Kuretani- san to respond, and for international, we'll ask Nick to respond.

Kuretani: In regard to the CT&T, for the Japan business, first of all, we currently are not actually disclosing in terms of product or in terms of recurring ratio. But in terms of recurring, sales force integration and operation thereafter, that type of operation, we are maintaining the top-class level in Japan.

In terms of products, it's difficult to define products in some sense. But what the ISID is providing, for example, HR software or accounting software, so we have those which are core or something that is closer to digital marketing. So, app-like service in social, so we have quite a varied things that we roll out. And so, at a moment, how much they account for CT&T, I don't have those numbers at hand with me, but the profitability of CT&T within our group to work on further enhancing that, I think we are making a lot of contribution towards that. And that is all for me. Thank you.

Priday: Yes, this is Nick speaking. Just answering in respect of Dentsu International. So, as you can see in terms of Q2 results, just to set the context, CT&T now represents 36% of our revenues for the international business. So obviously, growing in size and growing quickly as well.

If we look at the breakdown of the different component parts of CXM, Wendy gave you an indication of those areas with high growth rates, particularly experience in commerce and the B2B practice. Merkle used to provide more proprietary solutions. But today, we've moved to more of an implementation model supporting platforms, such as Adobe and Salesforce. So, it just shows the high-growth area, again in some more detail in respect of our CT&T business. I would say overall, though, the recurring revenue is growing due to ongoing managed services across the network, but we don't break that down any further. Thank you.

Igarashi: And Wendy, if you could explain the integration of brand for international business?

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