Hakuhodo DY : Minutes of Q&A in 1H of FY2021 Financial Results Briefing

Hakuhodo DY Holdings

Summary of Questions and Answers for 1H of FY2021

Date: November 12, 2021 (Friday), 15:30-16:30 Presenters:

Masayuki Mizushima, Representative Director & President Hirotake Yajima, Director & Executive Vice President Masanori Nishioka, Director & Senior Executive Corporate Officer Akihiko Ebana, Director & Senior Executive Corporate Officer Takeshi Tokugawa, Corporate Officer

• What were the factors behind the improvement in gross margin over the previous fiscal year? Were any of these factors temporary?

Excluding the investment business, gross margin in the first half of FY2021 saw an improvement of roughly 1.1% over the same period of the previous fiscal year, with 0.6% of this recovery coming from our overseas businesses and 0.5% coming from domestic operations. The main reason for the overseas recovery was the performance of kyu, which engages in a high percentage of consulting business. Domestically, there were various reasons for this improvement. The most basic reason was the success we had with operating activities aimed at improving our gross margin, including the remuneration structure at Group companies. Our client-mix and the degree of profitability for each product also had an impact. Furthermore, we have been promoting a shift away from outsourcing for several years with the expectation that we would secure business in the area of marketing execution. While doing so, we received pandemic related and the Tokyo 2020 Olympic and Paralympic Games related business, which also played a role in the improvement. We expect these businesses in the area of marketing execution will increase from FY2022 onward, and we therefore do not view such business as a temporary factor in contributing to improvement.

• Please tell us your approach of SG&A expenses in the second half. I understand that you were not able to use a great deal of operating activity expenses in the first half due to the impact of the state emergency, but do you intend to increase these expenses in the second half? Or, do you not intend to do so, as you have established a new approach to your operating activities?

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Operating activity expenses in the first half were at around the same level as they were in the same period of FY2020. Now that the state of emergency has been lifted, we expect that these expenses will go up. Workstyles, however, continue to change as demonstrated by such trends as the increase in online meetings and the decline in business trips, and we therefore do not anticipate that these expenses will fully return to the level that they were prior to the pandemic.

• In terms of Internet media, what has been the story behind the high rate of billings growth in this domain, and do you see this high growth rate continuing going forward? Also, what do you think of the impact of Apple's restrictions on Identifier for Advertisers (IDFA)?

Billings from Internet media continued to grow in the first half of FY2021, up over 30% compared with the previous fiscal year. With the continued shift toward a completely digitalized era, we believe that advertiser demand for Internet media will remain strong, as Internet media is expected to have a reach and effectiveness comparable to that of television media. In addition, the COVID-19 pandemic has made it difficult to allocate marketing expenses toward outdoor media and events, and as a result the marketing budgets of our clients have been shifting toward Internet media.

Restrictions on IDFA and cookies have not had a significant impact in Japan at this stage, and as such we expect to see growth in Internet media for the foreseeable future. With that said, Internet related-based clients in particular will likely be concerned with the loss of cost effectiveness resulting from these restrictions. We therefore believe that, in the future, we will need to respond to these restrictions by utilizing marketing methods that enable targeting without the use of cookies.

• Could you provide some specific examples of marketing DX? Also, what is your forecast for growth in this area going forward?

As I cannot mention specific examples at this venue, I will provide an outline of our marketing DX activities overall.

Communication between our clients and sei-katsu-sha has conventionally centered on indirect contact, such as advertisements and sales promotions. With the ongoing progression of digitalization, however, direct contact points are starting to emerge in a

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variety of forms, including owned media, apps, e-commerce websites, and contact centers. Through these types of contact points, it is now possible to conduct wide-reaching and comprehensive marketing activities that cover everything from service recognition to purchases. We are receiving various consultations from our clients as they move forward with these kinds of marketing activities. For example, communication tools such as LINE can be used as a contact point for broadcasting commercials, introducing products, and promoting product development all while collecting customer data. This kind of comprehensive marketing activity is referred to as marketing DX. In addition to marketing DX, we are promoting media DX and are taking steps to establish an integrated DX response structure on a HDY group-wide basis.

• What is the background of the record highs recorded for gross profit and operating income for the first half, even during the COVID-19 pandemic? Were these record highs the result of cost control measures via workstyle reforms? Or, did they stem from improvements in profitability due to changes in your service lineup? Also, are these record highs sustainable?

As I mentioned in the answer to a previous question, the trend of improvement in gross margin contributed significantly to this result.

Next, from the perspective of capitalizing on the recovery in advertising demand, clients in sectors that were heavily impacted by the pandemic were far more willing to engage in marketing activities in the first half of FY2021, compared with the first half of the previous fiscal year. This trend paired excellently with our initiatives to develop and propose marketing solutions that blend digital and analog technologies, which we have been promoting since the start of FY2020. Additionally, we have been promoting M&A of companies involved in marketing execution, such as companies with businesses related to call centers, temporary staffing services, and interior design. Through these companies, we have been proposing various business services to our clients. These kinds of capabilities allowed us to meet client needs pertaining to COVID-19-related work, which in turned contributed to our profits. Going forward, we will continue to aim for sustainable improvement in profitability by enhancing these capabilities on a wide range of themes, including digitalization and carbon neutrality. Furthermore, we believe that the cost structure reforms we have been implementing since the previous year, when we faced extremely challenging conditions, are gradually starting to bear fruit.

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• Although conditions in the domestic advertising market are expected to be strong in the second half, your performance forecasts call for a decline in profits compared with the previous year. Is this simply a conservative outlook, or is this forecast based on additional investments?

Gross Profit was up 8% in the first half compared with the same period in FY2019, and we anticipate its growth of around 6% in the second half. SG&A expenses in the first half increased 3% over FY2019, and double-digit growth for these expenses is expected in the second half. Accordingly, our forecasts call for a decline in operating income in the second half.

The rise in SG&A expenses will be the result of increases in strategic and operating activity expenses. As we anticipated at the start of this year, most of strategic expenses will be spent in the second half. Our forecasts assume that operating activity expenses will return to near the level that they were in FY2019. There is, however, a possibility that these expenses will be lower due to workstyle reforms and other factors.

• Are the strategic investments of ¥10.0 billion that were mentioned in the initial forecast included in the current forecast? With fierce competition in terms of recruiting AI specialists or consultant personnel, do you expect to use all the expenses for which you budgeted?

Strategic expenses have been factored into our performance forecast largely as planned. As for a breakdown of expenses, a majority of the expenses are being put toward investments in human resources, and we made progress with the recruitment of digital human resources in the first half more or less in line with our expectations. These expenses will impact our profit/loss situation in the second half. However, competition to recruit personnel to fill certain positions, as well as consultants and digital analysts, is fierce, and we are promoting recruitment activities while taking this into account. We will work to improve this situation in the second half, including conducting a review of our

recruitment strategy.

• Could you mention the organic factors behind the improvements in gross margin? Do such factors include recent trends such as new products, or are they more of an

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