HAKUHODO DY INCORPORATED : Summary of Questions and Answers for 1H of FY2018

Summary of Questions and Answers for 1H of FY2018

Date of event: November 12, 2018 (Monday)

Attending members from the Company:

Hirokazu Toda, Representative Director & President

Kunihiko Sawada, Representative Director & Executive Vice President Mitsumasa Matsuzaki, Director & Senior Executive Corporate Officer Masanori Nishioka, Corporate Officer

Q. Could you please explain the main reasons why you made a downward revision to your full-year forecast for the domestic advertising market? Also, could you comment on your forecasts for the second half?

A. While the domestic economy continues on a trend of gradual recovery in the first half, the domestic advertising market performed relatively sluggishly, remaining at around the same level as it was during the same period of the previous fiscal year. One aspect behind this sluggish performance has been the decline in advertisements by certain clients due to the continued occurrence of natural disasters. Another aspect we believe has contributed to this performance is the slight stagnation of growth in the online media market, which has driven overall growth in the domestic advertising market. In particular, several recent issues related to online advertising, including viewability, ad fraud, and brand safety, have been having a negative impact.

For our current second-half forecast, we anticipate highly energized marketing activities by all companies (particularly durable consumer goods companies and securities companies) next spring, which will be roughly six months before the consumption tax hike. Due to these factors, over the full year we project nominal GDP growth of over 1% and domestic advertising market growth of slightly less than 1%.

With the continued progression of digitization, we believe that Internet media will continue to realize double-digit growth over the medium term.

Q. In regard to the first-half performance of overseas businesses, could you please explain (1) the composition of revenue (organic vs. M&A) and (2) the main factors for profit increases and the Company's approach to maintaining profit levels?

A. (1) Overall overseas revenue grew 85.9%. M&A accounts for roughly 80% of our overseas revenue, and we realized M&A-based growth of 127.1%. On an organic basis, we achieved growth of 3.2%.

(2) The main factor for revenue increases was the solid performance of each kyu member company. In addition, to enhance profitability, we have been thoroughly promoting management activities that emphasize operating margin and have secured operating margin before amortization of goodwill, a major KPI, at the double-digit level. As a result, we believe we will achieve profitability in terms of operating income (after amortization of goodwill) for the full year.

Q. In regard to the takeover bid for D.A. Consortium Holdings (hereinafter, "DACHD"), could you tell us what you can about the merits of DACHD becoming a wholly owned subsidiary and your digital strategies going forward?

A. Our main aim behind making DACHD a wholly owned subsidiary was to gain a strong competitive edge in the growing digital domain. To move forward with the strengthening of functions to gain such an edge, we felt the need to leverage the resources that DACHD has cultivated in the digital domain within our marketing activities from the perspective of achieving Groupwide optimization. In order to do so, we deemed it necessary to make DACHD a wholly owned subsidiary so that we could accelerate the pace of our decision making and increase managerial freedom.

In terms of strengthening functions, we are focusing on three key points: (1) accelerating growth in the online advertising domain, (2) strengthening digital response capabilities in all media domains, including mass media, and (3) enhancing the data technology domain.

Q. As for recent trends related to the Company's advertising business development in the Internet media domain, could you please tell us about specific trends in your business collaborations and the development of new advertising products?

A. For new advertising products and product development in the Internet media domain, we are currently pursuing efforts together with various media companies and platform owners. These efforts include joint development of advertising formats with multiple social networking services and e-commerce business operators and collaborativeinitiatives within the data domain. We believe that such efforts will help us enhance our planning and proposal capabilities to advertisers, who are our main clients. However, we are unable to explain in detail on specific projects at this time.

Q. Please comment on the reasons for improvement in domestic gross margin as well as on your forecasts and plans going forward.

A. In regard to gross margin, we aim to enhance the efficiency and profitability of all operating companies, regardless of the fields in which they operate. In Japan, the main reasons for improvement in gross margin have been the shift to in-house production in the promotion domain. This refers specifically to an increase in the in-house production rate at subsidiary production companies within the Group.

The domestic adverting market performed at about the same level as it did during the same period of the previous fiscal year. Amid an environment in which it is difficult to realize billings increases, we intend to thoroughly implement efforts to stabilize in-house production rates and manage costs in order to improve profitability of our production services, which include Creative and Marketing / Production.

Q. While this relates more to the next Medium-Term Business Plan, could you please tell us what you can regarding the Company's future approach to its M&A strategy?

A. Overseas, we will continue to pursue M&A activities with a view to completing the strategic portfolio of kyu. Our main aim in doing so is to incorporate innovative functions. To this end, we will narrow our sights down to highly competitive companies that maintain business models that can secure operating margin at a high level.

For Japan, amid the occurrence of various innovations, we will remain open to implementing M&A if we believe it will allow us to acquire necessary strategic functions. However, we are not at a stage in which we can announce any M&A projects.