Dentsu : H1 FY2023 Questions and Answers（119KB）

Dentsu Group Financial Results for H1/Q2 2023

Questions and Answers

Date: August 14, 2023 (Monday)

Hosts:

Hiroshi Igarashi, President & CEO, Dentsu Group Inc.

Nick Priday, CFO, Dentsu Group Inc.

Michael Komasinski, CEO, dentsu Americas & CEO, CXM, International Markets, dentsu Norihiro Kuretani, CEO, dentsu Japan

Question 1: Two questions if I may, please. First, I can appreciate that you're being a little bit sensitive about what you're saying for commercial reasons, presumably around the DACH segment issue. Perhaps we could phrase it differently, and I could ask what lessons have been learned from that experience?

My second question is, Nick, you were talking about the CAGR of 4% to 5% and the 18% margin target in the medium-term plan being probably beyond reach. What thoughts do you have about that medium plan? Thank you.

Igarashi: Thank you very much. CFO, Nick Priday, will respond to your two questions.

Priday: Thank you for the questions. So, in terms of the DACH impact, and, as you phrased it, the learnings, obviously, just to repeat what I said in the presentation, our Q2 performance in DACH was affected by a one- off financial impact in the DACH cluster. The results were adversely affected by what was a complex business transformation and systems integration issue. We did have a number of parallel transformation work streams happening at the same time. This resulted in the misalignment of certain business processes and systems. In terms of the impact, which I referred to during the presentation, our European performance in H1 was down by more than 5% organically. We would have reported positive growth in H1, except for this issue. In terms of our margin guidance on a full year basis, which had previously been 17.5% downgraded today to circa 17%, again, we would have been broadly in line with the previous guidance if it wasn't for this DACH issue. So, I want to provide some quantification. We continue to interrogate the root causes of the system issues within DACH and take all appropriate measures to prevent recurrence. That work is ongoing. Ultimately, within any transformation, technology is just one element of it. It's the process change and adoption of that technology that really brings about the transformation and the benefits. Also, ensuring we are providing adequate support is critical, as well as sharing cross-border knowledge from other regions or markets. But as I say, the financial impact is one-off and has been accounted for in the Q2 numbers, and we will continue to learn lessons from this episode. Thank you.

In terms of the second question about the medium-term plan, essentially, we're not withdrawing the plan or the target. We're just recognizing that at this stage, given the downgrade to our full year revenue outlook for 2023 and the margin, we're starting in a more difficult place in terms of delivering on the 4% to 5% compound annual growth rates, which we've guided to in the midterm management plan. So, it would take quite a significant level of growth in 2024 to deliver on that CAGR growth rate. So, we're just calling that out, recognizing that upfront, that that represents a challenge. With the margin guidance now for 2023 at circa 17%, again, getting to 18% is a stretch. Again, we're not withdrawing that guidance formally, but just recognizing it's a stretch at this stage. Thank you.

Question 2: I have two questions as well. First question. As you have explained in regard to the DACH cluster issue, I'm not quite sure about the background, so could you further elaborate on that? It was explained that the cause was system integration, so was it a kind of a system trouble that you experienced? Based on your explanation that you have given, I could not quite understand why it had impacted revenues. So, if you could give more color and detailed explanation, it would help.

The second is regards to the APAC, the goodwill impairment. Could you explain the background to this as well? Was the advertising market weaker in certain areas more than expected? Or was it that there was a structural issue? What is the reason that you had to take the impairment of the goodwill?

Igarashi: I would like to ask Nick to respond to those questions.

Priday: Thank you for the two questions. So, building on the comments I just made around DACH and your question around whether it's connected to system integration issues, I would say that it's a combination of a complex business transformation and systems integration issues. It's the extent of the transformation within the DACH cluster that added to the complexity, with a number of systems being transitioned at the same time.

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Also, as you would appreciate, DACH is a combination of markets and a multicurrency cluster. But essentially, we have seen some delays to business processes as we work through the complexity of the transformation initiatives. Those delays include delays to client invoicing, as we need to ensure we fully reconcile the work that we've done and that we've completed for clients before we invoice. So, hopefully that provides a bit more color in terms of the issue. It's worth noting that, across other regions and markets, those other regions and markets are typically more progressed with the transformation. So, for example, one of the systems being introduced within DACH has been successfully rolled out across approximately 70% of the international markets already, in terms of revenue composition. So, I just wanted to provide that additional color, too.

If I move on to the second question around the Asia Pacific goodwill situation and the impairment recorded in Q2, we do have to review goodwill annually for impairment. We have, however, taken this charge at Q2 because if there are indicators of impairment, we need to assess those indicators at the time. Also, there are a number of factors, including the performance of the business across Asia Pacific. You've seen the Q2 organic revenue decline that we've reported. We also need to take into account the higher interest rate environment and the longer-term prospects of growth across the economies which we operate in. We also need to assess then the discounted value of the long-term projected cash flows against the carrying value of goodwill. As a result of that analysis, we have recorded a further impairment charge in Asia Pacific of some JPY14.6 billion. So, that's the background and the further color in terms of the Asia Pacific question.

Question 3: Thank you very much for the presentation. I also have two questions. First of all, at the end of the presentation, you said that there is a good pitch pipeline. Can you quantify that? How much potential pitch is there in the pipeline in H2 and next year? That's my first question.

Secondly, by region, how do you deem the organic growth rate by region for H2? It may be difficult to give specific numbers, but what it the trend against the Q2 results? How do you feel about Q2 for Japan business as it showed signs of recovery? Can we expect brighter news in H2? So, can you give us a regional update on how you will proceed in H2? Those are my two questions.

Igarashi: Thank you for those questions. So, I, Igarashi, will explain the overview of the pipeline situation. Should there be any follow-up comments, representing the Americas, Michael, could you add some comments later on? Also, on the regional situation, I, Igarashi, will take that question. Then, on Japan business, I will ask Kuretani to respond.

First of all, on the pitch pipeline, the media pipeline is sound, and there are potential projects for each region. I cannot give you any clear numerics, but we are participating in large scale pitches as well. So, we will further strengthen our efforts to win these pitches in the pipeline. It won't be easy, but we are making a Group-wide effort to capture those opportunities. Media pitch will follow the trend of H1 and we expect a solid H2 to continue. As for CXM, the pitch pipeline is recovering, mostly in North America. Michael may add to that later on. But as I have already mentioned, the business cycle is prolonging. So, from pitch line to billing, we need to view the situation with some conservatism. CXM, CT&T, Michael, would you like to add a few comments?

Komasinski: Yes, hi. It's Michael Komasinski. Thanks for the question. As Igarashi-san mentioned, the media pipeline is very healthy at this point, with over 5.5 billion in that pipeline globally across the international markets, and 88% of that being offensive. So, we like the shape of that pipeline. In the CXM business, we saw our Q2 pipeline improve, both in terms of size, but more importantly, in terms of health, with more new opportunities coming into it, which improves the aging of that pipeline. So, we liked the improvement of the shape of it, as well as an increase as certain sectors start to come back into that that had slowed in H2 of last year and in the early part of this year.

Igarashi: Thank you, Michael. By the way, let me make one comment regarding Tag, for which acquisition has been completed. Tag is seeing many opportunities. A total of 44 projects are currently underway. Based upon

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these projects, we will be discussing within our group on how we can scale upon those projects. Also, these projects will bear fruit in H2 as business opportunities.

Your second question was H2 for the various regions. I will leave it up to Kuretani-san to speak about the Japan region later on. So, I will explain about business outside of Japan. Americas, as I said, under the leadership of Michael Komasinski, our new CEO, the eight-point plan is currently underway and various initiatives are being implemented. We've made an announcement regarding the new management team. This is a team that we have put into place in order to exercise strong leadership, to accelerate turn around in the Americas business. We talked about the media pipeline and the CXM pipeline being robust. So, based upon those factors, we truly hope that the Americas will get back on the track of recovery.

On EMEA, Nick talked about the DACH cluster. If that issue had not been in place, we would have recorded positive growth. We are working hard to maintain our existing accounts as well as acquiring new businesses. Yes, the external environment is difficult. But in EMEA, I believe that the momentum can be sustained. On the other hand, regarding APAC, for H2 there has been some delay in recovery of the China market, which is one concern. But, as we talked about in Taiwan and in Southeast Asia, the situation is quite healthy. Generally, there still are some signs of bearishness. But with the recovery in India and also with the new CEO for China in place, we will make efforts to achieve recovery. So, now I hand over to Mr. Kuretani to speak about the Japan market.

Kuretani: Thank you very much. This is Kuretani speaking, and I would like to make some comments regarding the outlook of our domestic business. First of all, as Igarashi-san and Nick explained, as far as the Japan business, CT&T double-digit growth continues. For advertisement, Q1 was a slow start. But in Q2, we began to see signs of recovery. In terms of organic growth, it was minus 0.2% in Q1, and plus 3.4% in Q2. For H1, we achieved 1.4% organic growth rate. On the full year guidance for Japan business, last year, we achieved historical high net revenue, and I am confident that we can achieve another historical high for this year as well. Transportation and leisure, retail, finance, cosmetics, households, real estate, these are some of the sectors that were good in H1. Communications, beverage, food, automotive, these are large sectors, which will see recovery in H2. Also, we track the diffusion index on a monthly basis and we continue to see recovery. Also, major sport events, basketball, Rugby World Cup and World Athletic Championships sales are proceeding very smoothly for these major sport events. So, business in Japan is in good shape with recovery in the advertisement market, with CT&T going beyond 30% for the domestic market - that was the target for the mid-term plan for 2024, but we think that we will be achieving that target earlier. Thank you.

Igarashi: On Americas, in addition to what I've already mentioned, Michael, anything to add to that? If you could briefly follow up on what I've already said.

Komasinski: Yes, thank you. So, in the Americas, we have quickly implemented a series of changes really to make our brands more complementary and a little more easily interoperable in the way that they come together around integrated client opportunities. We think that that is the trend in the market towards integrated solutions and integrated servicing of clients. So, we continue to make changes within the business to realign capabilities and leadership in a way that makes the business come together more easily. We think that that will help improve our conversion rate, and ultimately lead to better retention and growth of existing accounts. So, those are some of the changes that we have been trying to get in place in the region here quickly. We'll continue that change agenda through the end of the year.

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