Dentsu : Q3 FY2022 Questions and Answers（136KB）

Dentsu Group Financial Results for Third Quarter of Fiscal 2022

Questions and Answers

Date: November 14, 2022 (Monday)

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

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

Question 1: First of all is the performance for the rest of the year. You did not change your plan. But in order for you to achieve the guidance, the organic growth for Q4, what is your view for Japan and also International? Of course, the negative was large in Q3 because of special factors. But when we consider the global, the advertisement, the situation, do you feel you can catch up? Or do you still have some headroom?

Also, Russia, I understand there is some upcoming impairment. Can you still achieve the guidance, even with that in mind? That is the first question.

The second question is regarding CT&T, not only for yourselves, but global agencies are performing quite well right now. They may not be using the word CT&T, but they are probably moving in the same direction. They may sometimes call it CX, but the global agencies overall, the trend, is that a structural reform trend that we are seeing overall? Other mega agencies, other agencies, is there any difference in regard to what you're doing versus what they are doing? Are there any similarities? Please elucidate on that point.

Igarashi: This is Igarashi speaking. Thank you for your question. We have received two questions from you. First of all, the full year guidance, including Q4 performance, how we are looking at the rest of the year performance situation globally, and also the situation in Japan. In regard to the situation overseas, with the present impairment in Russia, can we still achieve our guidance? That was the first question. I will respond to this question. After me, I will ask Nick and Kuretani-san to respond respectively for their business.

A second question for CT&T. You have indicated that global agencies are heading in the same direction. What is the advantage that we have over them? That was essentially your question. I will also respond to that question.

In regard to the first question, now after Q3, we are heading into Q4. We feel that we will be able to achieve our targets, be they for the business in Japan or business overseas. We are not within the macroeconomic situation that we can be optimistic about, but the objective will still be implemented steadily, and we feel that we will still be able to achieve the guided numbers.

For individual projects, I would like to ask Nick to explain about the international business and then I will ask Kuretani-san to talk about the Japan business. Nick, if you could also refer to the Russia business.

Priday: Yes, of course. Thank you for the question. The first thing I'd say is that the full year guidance for Dentsu International remains unchanged, at 5% to 6%. In terms of the CT&T business, we are still very much leaders in this space. We are very much exposed more than we were during the past to revenues from CT&T. We've put us in a good position. It's a resilient position, but also one which enables us to drive growth. On a year-to-date basis, the business across Dentsu International has performed very strongly.

If you compare us then to the consultants, we also have the exposure to media that they don't. We do believe that puts us in quite a unique position to drive growth in the long term. But in terms of the specific question for 2022, our guidance remains unchanged for the full year for the international business, at some 5% to 6%.

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In terms of Russia, we've announced today that we are approving the signing of the deal to transfer ownership of our Russian business to our local partners. That's positive. We have incurred some losses on the exit so far. We've recorded those losses. We expect that the full year losses will be around JPY37 billion. There will be some further elements to recognize in Q4 as we follow the accounting rules.

So no change to the guidance in terms of full year expectation. We do think we're well placed to drive long-term structural growth because of our exposure to CT&T. In terms of comparison to competitors, we do have that exposure to media, which the consultant groups don't. Thank you.

Kuretani: Next, allow me to explain about the Japanese business. First of all, against an exceptional performance last year, we have been able to keep a flat performance until September. This is something that we are quite satisfied about. Digital advertisement and BCDX, or CT&T, this business remains progressing very steadily. What remains is what will happen in regard to mass advertisement.

And the weakening yen increase in raw material cost and supply chain issues. But if we look at Japan overall, the client response seems to have made a lot of progress. Given the situation with COVID- 19, we are seeing people flow recover, including inbound travelers. Food service, recruitment, transportation, leisure, pharmaceutical, retail, distribution, these are areas that are starting to regain momentum.

Over the last number of years, the consumption by the wealthy remains quite strong; whether it be fashion, luxury, or luxury vehicle brands, they are becoming more prominent. The organic growth rate, we intend to work towards achieving those numbers. That is all from me.

Igarashi: The second question, CT&T, how we compare against the global agencies, where we have the advantage. As you have pointed out, I feel that there is a great market opportunity here. Because of that, other agencies are also starting to focus their managerial resource in this area. The point is quite correct. I think everyone is starting to recognize that there is a great market opportunity here, and so people are starting to focus on that area.

In that regard, for our international business, Merkle in the United States is certainly an outstanding performer. The know-how they have, the historical relationships that they've built with our other clients, they have a very strong business foundation. On top of that, in EMEA, we are continuing to expand our capabilities. We have quite an outstanding advantage in that regard. Also, in EMEA and other markets included, the CT&T domain is growing in some markets in excess of 20%. This is becoming more prominent on a global basis.

I think we can clearly say that this is an advantage, which is that, as I've explained about offshore and nearshore assets, we are able to use our assets there. We are able to operate the CT&T area in a very efficient way. We're also gathering capable people and experts, not only engaged in the delivery, but also with the possibility of client-facing areas, we are now starting to form a powerful asset.

In Japan, too, our ability to develop business, this is becoming the driver of our CT&T operations. Also, the various approach points, we are linking the various challenges faced by our clients. So, CT&T in Japan is also strengthening its unique strength. That completes my response.

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Question 2: I also have two questions. First, regarding Japan, the ratio of CT&T to net revenue. In comparison to last year, in the July to September quarter, I believe the ratio has grown substantially. But in comparison to April to June, although very slightly, it is declining. Once again, in this last quarter, what efforts did you make in CT&T and going forward, what will be the pace of growth of CT&T? How should we understand the pace to be? Is it going to be gradual growth? Or despite the dissolving economy, do you expect strong growth from CT&T? Could you elaborate on this?

The second question concerns the new management structure. You have announced a new management structure. Once again, to begin with, in comparison to the past structure, or what were the challenges you found in the past structure, and the reasons that you have decided to transition to the new structure? What were the challenges? With the renewed management structure, what is the KPI that you would like to improve the most? That you would like to change the most? That is my second question.

Igarashi: Thank you for your questions. We have received two questions. First, about CT&T in Japan, efforts in the latest quarter, and outlook going forward, I would like to ask Kuretani-san to respond to that question. The second question was on the renewal of management structure, and I, Igarashi, would like to respond to that question.

Kuretani: Regarding CT&T in Japan and outlook going forward, as we discussed at the last earnings call, in the CT&T area, we do not have any missing capabilities. We have been able to complete laying the foundation. What is necessary to achieve growth looking forward is to ensure we have enough quantity rather than quality. We would like to emphasize recruiting and training. Regarding hiring, in the last nine months in Japan, we were able to achieve our target of 10% increase. We are able to secure people. We are making good progress.

In the last quarter, there was a slight decline. That is due to reasons such as delivery timing. The basic trend of CT&T coming to account for a larger percentage remains unchanged. In 2024, CT&T is expected to account for 30% of net revenue in Japan. That is the target. As a premise to that is that 40% of people in Japan will be dedicated to CT&T. In both respects, we are confident that we are able to achieve, or we believe that we may be able to achieve, these targets ahead of schedule.

Igarashi: I would like to address the second question on new management structure. In a large sense, from the beginning of the year, I have advocated the management objectives, which is to enhance our corporate value, to be pursued by everyone in the organization. This includes corporate value in the market, corporate value for our client, corporate value for our partners, and for our people. In all of these respects, to enhance value, we have renewed our determination to make greater efforts, that I announced in the beginning of this year.

As a basis for that, we have to increase our competitiveness. As a result of stronger competitiveness, what we are able to achieve will lead to greater growth. Corporate competitiveness will have to be ensured. That is the major objective behind the new management structure.

Including various committees, we are making sure that we will have a very efficient, speedy information exchange and decision-making in both Japan and internationally.

In a large sense, in the medium-term plan, we are making efforts to achieve medium-term plan objectives. But over the longer term, what should be aimed for? What will be the road map? What

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steps should we take? That is also a very important theme as a company. In addition to short- and medium-term KPIs, over the longer term, where we should be heading, we will be establishing targets, objectives, and we will be striving to achieve these targets, Group-wide as one. There will be clarity in terms of managerial resource allocation, and we will be even more focused on our business and management. To ensure that, we have decided to introduce this new management structure.

As we indicated in our announcement, we are once again strengthening our client centricity. Global clients and growth clients in regions, we will focus on these clients, and we will enhance our competitiveness and grow together. For that, we have decided to strengthen our efforts through this new management structure of One dentsu.

Question 3: First of all, can I ask, on the M&A front, obviously, the global situation has been changing quite dramatically. Are you seeing that now reflected in the availability of opportunities, or in pricing?

My second question is on nearshore and offshore. You've made a lot of progress there. What more can you do on that front?

Igarashi: Thank you for your question. In regard to your first question regarding M&A, the situation in M&A continues to change in the world. How are we going to work on M&A? I will ask Soga-san to respond to that question first. Then if there is any follow-up, I will ask Nick to add comments. Your second question in regard to nearshore and offshore, what more can we do? I will respond to that question.

Soga: This is Soga speaking. Thank you very much for your question. First of all, in regard to M&A on a global basis, macro, the environment is becoming quite unclear. As I've explained in the announcement today, we are trying to expand business in the structural growth area, where we are not impacted by the economic condition very much. In other words, we're trying to expand the CT&T area. Even when the economy on a global basis becomes unstable, we still have high expectations in this area. This is not only for us. I think our peer groups, or competitors, in a new competitive landscape are probably all looking in the same area.

When the macro environment is unstable, the M&A, the situation whether it be price, or conditions, or terms, they don't seem to have changed very much. If anything, maybe the situation has become even tougher. But as I said before, we still have a quite strong pipeline. And so, in the near future, we would like to be able to share with you the track record of our M&A going forward. That would be my response.

If there is anything to add, Nick, please go ahead.

Priday: Thank you, Soga-san. Thank you for the question. Our M&A activity remains really active. We have a number of deals in the pipeline, which we're looking at closely. Obviously, the intention is to continue doing what we're doing and expand our exposure to CT&T practice. I would say that, on pricing, the market was quite frothy a year or so ago, and it's come off a little bit, but it's still very competitive, as Soga-san says, because there are a number of different parties competing for the same assets. But we always think we have a good acquisition process and our approach to M&A and how incoming vendors act on the roles they have within the organization always seems very positive.

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