Dentsu Group Financial Results for Q1 2024

Questions and Answers

Date: May 14, 2024 (Tuesday)

Hosts:

Hiroshi Igarashi, President & Global CEO, dentsu

Yushin Soga, Global CGO & Global CFO, dentsu

Michael Komasinski, CEO, dentsu Americas & Global President - Data & Technology, dentsu Takeshi Sano, CEO, dentsu Japan

Question 1: First is just a confirmation of numbers. In Q1, you had an impairment loss of 6.2billion yen in the breakdown. Was this incorporated at the beginning of the year? And if it's not factored in, then will this impact the full-year forecast? And from the Q2, will there be a possibility of such similar impairment losses?

And next is regarding organic growth. In the pipeline, your win rate is rising. Your Q1 track record is my question. And once again, in each area, is your win rate rising or, as you mentioned, is it because of the new products, or maybe the clients in the industry you are strong at? Is the budget increasing there or decreasing? You were a bit behind last year. And so, what is the reason your momentum is rising? By region If you could explain it, I'd appreciate it.

Soga: First, regarding the impairment losses, in FY2023, we recognized the ones that were out of scope of what was recognized in FY2023. In some part of APAC business, it was not a large amount, but, in some business, we recognized these impairment losses. Was this included in the budget? Well, we do not budget the impairment losses. And so, it was not included in the budget. But because of the amount, it did not impact the full-year forecast.

Regarding the risk of impairment losses going forward, in terms of risks, we always recognize the risk and run the business in a way that it does not materialize. I think that is the responsibility we have for our business. As of now, the risk of a big material impairment loss or risk is not recognized at this point. But towards the H2, we are based on the assumption that our financial performance will improve. So, we will operate the business in a way that this risk does not materialize.

Igarashi: For organic growth, our peers' pitch win rate is, in fact, improving, rising. More specifically, net wins, compared to last year, we've been acquiring about twice as many accounts. The brands that I mentioned earlier, Lowe's and Papa John's, are the big accounts that we acquired.

And pipeline, 89% is offensive. So that is also very strong.

Creative, as mentioned earlier, large deals have been acquired. Overall, we are seeing a positive trend.

In Merkury, this product, is Merkury contributing to this? I would like Michael to talk about that later. But yes, it is contributing to our pitch and has big potential going forward.

And on media, our new client wins are rising, third-party aggregator, COMvergence's Q1 new business win ranking;. And we returned to one of the top three in the first quarter as reported. Overall, we are trending very positively. Of course, there is a time lag of the actual acquisition of the new clients, but we are off to a great start.

Now, CXM is rather soft, as Soga-san mentioned earlier, but the pipeline is a slight increase YoY. Of our global clients, the tech sector proportion is large. We've been mentioning this from the past. The spend recovery in this industry has been strong since December last year. And so, we're seeing an overall positive trend.

Komasinski: I'll introduce one or two new points. As you said, our win rates in the Americas are at a healthy level. And I would say a lot of the improvement in those win rates took place really over in the H2 of last year and in Q1. And so, they're probably above our long-term norms. It's now letting that elevated level of win rate sort of capture share and volume as we work through quarters and comparatives.

As was mentioned, the pipeline for what I would characterize as kind of the advertising market-so think about media, creative, and the marketing transformation that clients want to drive around that set of activities-is good and steady at this point, and our pipeline reflects that.

It is strong whereas what I would characterize as the technology enablement space-or broadly what we refer to as CT&T-continues to have that elongated sales cycle, which is potentially a hangover of a lot of spend

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from clients in 2021 and 2022, or just part of overall cutback in marketing budgets as has been documented in a few different publications, including the Wall Street Journal just yesterday.

So, within the Americas, with our elevated win rate, trying to capitalize on that advertising, marketing transformation set of opportunities, it really is leveraging our integrated structure and our Merkury platform to provide our competitive advantage to our clients. And increasingly, we go to market to produce measured business outcomes for our clients. And I think that's where that market continues to move to.

Sano: Let me talk about Japan business. Q1 was relatively strong, thanks to the business that we've always had. The auto mobile and telecommunications, they were down last year and are recovering this year.

And next, the food industry is strong. So that's another positive aspect. And the transportation and leisure and distribution and logistics and retail are also strong.

In terms of domain, CT&T domain remains strong. And for media, in H1 last year, digital was a bit struggling, weak, but Q1 had double-digit growth, and TV is recovering.

Next, our competitors, in Dentsu Japan companies, the pitch win rate is rising, especially in terms of industry: distribution & retail and transportation & leisure, the win rates were especially high in these areas in Q1. The reason is because of the Mugen AI products and our integrated proposals that we've always been strong at.

Question 2: The first question is regarding the strong performance in Japan right now. The advertising market, the sustainability, how are you looking at the sustainability of that market, the sort of advertising market, in Japan? Is that based on the stand-alone events or promotion having a greater impact? And I would assume that was somewhat larger in terms of influence until March. But since April, the strong trend is continuing. That's the first question.

The second question is on what Soga-san, the CFO, said before, the Q1 was more or less within expectations but underlying operating profit for the full year, 180 billion yen. If we take that into consideration, then from the Q2 onwards, you have to realize quite a strong return. Otherwise, it may be difficult to achieve the full- year number.

From H2 of the year, not the billings, but the cost reduction, the impact on the measures to improve operating margin, do you still have rooms to implement some of these additionally? The measures for H2 of the year are to achieve the consolidated 180 billion yen, please?

Sano: As for the Q1, it wasn't the case that there was an impact from a large event. Rather, it was more based on the expansion of our normal operation. And if you look at last year, we had WBC, which was kind of a naturally popular event, and we were able to gain the earnings from such events.

In regards to those one-off events, we were somewhat behind. So normal marketing or the other CT&T domain, we have been able to gain back some business there, which has enabled us to achieve these positive results. That was the case for Q1.

Q2 onwards, clients, they have relatively a good view on the economic outlook and with the wage level increasing, leading to increased willingness to purchase, it's likely to lead to great investment from the client companies. We're expecting our strong situation to continue in that regard. That concludes my response.

Soga: On 180 billion of the operating profit, are we confident? Well, this is a level that we must achieve. And I explained that the result will be kind of more leaned towards H2 of the year. Mr. Igarashi and I also explained the grounds upon which we expect this to happen.

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But we had minus 3.7% organic growth already in Q1, and the momentum of the improvement from Q2 will be something that we need to continue to watch on a monthly basis. It's not the case that we have just an optimistic view about the recovery in the H2. We will look at the recovery of the top line so that we can affect appropriate cost control, which we are doing right now.

For this fiscal year, the main focus of the management is to focus on returning the top line recovery. If we recognize the risk on the top side, it's not the case that we're going to work on reducing costs immediately, particularly in regards to personnel.

At the same time, we have T&E, these indirect costs. In regards to indirect costs that will support the top line, we want to control that as much as possible. This is what we refer to as due diligence. Through that, we will try to control the commitment and the guidance that we have given to the market. That's the kind of thinking that we have at this point in time.

Igarashi: Allow me to add a comment as well. Now, for this fiscal year, we have said we are going to focus on internal investment for us to enhance our competitiveness. Until now, we have acquired assets through M&A and we want to utilize them in an effective way. We want to enable that through this internal investment. This type of cost has been identified from the start of the fiscal year. But we have a simple One dentsu operating model. And this is a clear organizational structure that we have shifted to.

By doing this, we have been able to thoroughly review redundant organizational costs. The cost that we have been able to reduce there is now diverted to internal investments. So, we're doing this in parallel. In that regard, we are working on cost reform internally in order to work on achieving that operating margin.

Question 3: First of all, on CT&T, you talked about the cyclical downturn and how you hope that's going to be changing. But do you see the strategy work that's coming through, do you think there's going to be a structural change in the scale of the opportunities that are available in that segment? And what do you think is needed in terms of the global economy for those sales cycles to shorten? That's my first question.

My second question revolves around the plant leads. Have you now gotten your full team of client leads in situ? And what's the position on the accelerated clients?

Igarashi: CT&T, unfortunately, this year, the percentage is down because of the reasons Soga-san explained earlier. I will not repeat his points, but in Japan, it is strong.

In the US market, as Michael said earlier, the economy is still down. There's a cyclical downturn. But in the Americas and in APAC, the pipeline is increasing gradually, as we mentioned earlier. The scale, the size may be a bit smaller, but we continue focusing on this area and produce good results. We will continue making effort in this area. No change there about that.

Komasinski: Your question about how strategy pulls through projects and what we think the future of those projects looks like, it's a true statement that an uptick in strategy does tend to predict projects that would manifest from there. Right? That is a road map for a client, and that tends to kick off a series of projects that, over time, can become quite significant.

In terms of what draws the pace and size of those projects, I think a lot of it has to do with macroeconomic factors. We need clients to, sort of, be in situations where those investments in experience and customer touch points are essential for taking market share or remaining competitive relative to their peer set.

I think, in some ways, especially in the US, the strong macro economy has maybe lessened some of the urgency around some of those investments because there is strong demand in most industry verticals, maybe not all.

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You couple that with that sort of hangover effect or regression to the mean coming off of really heightened levels of spending on transformation in 2021 and 2022, and I think that's sort of how we end up in the situation that we're in currently.

I think potentially a soft landing or some cooling of consumer demand is actually probably net positive for CT&T because, again, what you need is for clients to look at those transformation investments as essential and not discretionary. And it feels like, with steady demand in most sectors, clients have decided to pull the advertising lever instead of the marketing transformation lever. And we just, sort of, need that situation to change basically.

Igarashi: To your second question, client lead, we have IGS, Integrated Growth Solution, as our growth driver and commit to clients' challenges. This is not just a single solution that we offer to clients. It's not that we offer a single solution and address clients' challenges. We need to combine multiple solutions and fully commit to clients' challenges and client lead, ICL, Integrated Client Lead, is the one that leads this initiative. And we are increasing the headcount in this area year after year.

Of course, the sales, the EIGYO sales and marketing model, we have many EIGYO who commit to clients. But we also have ICLs. The number of ICL headcount is increasing year after year. And so ICL will commit to clients' challenges and offer integrated solutions to address and resolve clients' issues and challenges.

Which key priority clients should we target and meet the demands of? Which area should we focus on? This is our accelerator client initiative. The Americas team has a very fine-grained detailed analysis in this area. And we are producing good results among our global clients. This is the symbol of our client-centricity and our uniqueness. And so, we will continue focusing strongly in this area.

When we announce our financial results, we will share with you the results, the track record, in this area. I hope you could continue paying attention to this.

Question 4: Now, the next midterm management plan is being established towards the H2 of the year. Now, you have the registrational impairment loss. But then you're talking about the utilization of AI in Japan, increasing marketing share and so forth. The basic thinking is that, for the next midterm management plan for regrowth, what are the possibilities? Is there a greater probability of achieving further growth? I think you're still planning to come up with specific numbers in the next midterm plan, but what is the regrowth that are expected in the next midterm period?

Igarashi: Based on One dentsu, we have the One dentsu operating model. We are converting to this model. The focus client and the focus markets are identified, and we are approaching this in a well-balanced manner. We want to respond to the challenges and issues of the clients. We are seeing outcomes being achieved based on this type of initiative.

In the last number of years, we went through tough restructuring, and we have gone through unexperienced client losts as well. But what we are working on right now, the outcome of this, everyone is in agreement and are advancing this fully committed. On that basis, the midterm management plan, our role, aim for growth, and we are going to aim for achieving organic growth. That will be something that we intend to show as part of our plan.

From this fiscal year, we started the finance committee, which is part of the Board of Directors' structure. It would be the realizability of the midterm management plan and also KPIs to measure the progress. The settings of these KPIs are also discussed thoroughly at the finance committee as well. We are going to be fully

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mindful of the shareholders' perspective and the market's perspective as we establish our midterm management plan. Please wait for them to be announced.

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Dentsu Group Inc. published this content on 15 May 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 15 May 2024 11:49:14 UTC.