Market Overview

Dentsu Inc. H1 FY2018 Consolidated Financial Results

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(The first half ended June 30, 2018 – reported on an IFRS basis)

Dentsu Inc. (TYO:4324)(PINX:DNTUF):

Note:

  • IFRS 15 "Revenue from Contracts with Customers" is applied from
    January 1, 2018. In this material, past results are also presented on
    a pro-forma basis to facilitate the year-on-year comparison.
  • The term "Gross profit" is changed to "Revenue less cost of sales"
    from Q1 FY2018.

Executive Summary

  • In H1 FY2018 the Dentsu Group delivered total growth of revenue less
    cost of sales of 7.6% (constant currency basis) and organic growth of
    4.0%.
  • In Q2 FY2018 the Dentsu Group delivered organic growth of 5.9%; the
    fourth consecutive quarter of improving organic growth.
  • In H1 FY2018, the Japan business delivered total growth of revenue
    less cost of sales of 4.7% and organic growth of 4.7%, in part, due to
    an increase in digital-related services and new business wins. The
    international business, Dentsu Aegis Network, delivered total growth
    of revenue less cost of sales of 9.7% (constant currency basis) and
    organic growth of 3.4%, partly driven by new business wins in H2
    FY2017.
  • Underlying operating profit declined 1.8% (constant currency basis).
    In Japan, although this was partially offset by planned investments in
    the working environment reforms, profit grew. At Dentsu Aegis Network,
    its profit decline reflects planned investments in global platforms
    and systems to increase shared services and investments to drive top
    line growth.
  • FY2018 net profit guidance is revised upwards due to the expected gain
    on sales of shares of associates in Japan to be recorded in Q3 FY2018
    and other factors.
  • In response to the rapidly changing business environment, the Dentsu
    Group has begun to consider its changes in a group holding structure.
    Please see separate press release for further details.
 

Financial Results for H1 FY2018

Consolidated Group (million yen)  

H1
FY2018

 

H1
FY2017*

 

YoY
change, %

 

Constant
currency
basis, %

Revenue 481,654 443,678 8.6 -
Revenue less cost of sales** 445,739 412,226 8.1 7.6
Statutory results
  • operating profit
40,533 42,923 (5.6) -
  • net profit (attributable to owners of the parent)
10,786 29,085 (62.9) -
  • basic EPS
38.26 yen 102.59 yen (62.7) -
Underlying results***
  • operating profit
60,862 61,970 (1.8) (1.8)
  • operating margin
13.7% 15.0% (130) bps (130) bps
  • net profit (attributable to owners of the parent)
31,592 39,382 (19.8) -
  • basic EPS
112.07 yen 138.91 yen (19.3) -
EBITDA**** 69,888 71,192 (1.8) -
Average JPY/USD rate 108.7 yen 112.4 yen (3.3) -
Average JPY/GBP rate   149.7 yen   141.4 yen   5.9   -

* IFRS 15 "Revenue from Contracts with Customers" is applied on the
previous-year results and their figures are adjusted.

**Revenue
less cost of sales is the metric by which the Group's organic growth is
measured. Organic growth represents the constant currency year-on-year
growth after adjusting for the effect of businesses acquired or disposed
of since the beginning of the previous year.

*** See below
for definition of "underlying."
**** See below for
definition of "EBITDA."

H1 FY2018 results

  • The Dentsu Group delivered growth of revenue less cost of sales of
    7.6% (constant currency basis) in H1 FY2018:
    • 4.7% in Japan, and 9.7% (constant currency basis) at Dentsu Aegis
      Network driven by acquisitions and organic growth.
    • Contribution amount to the increase: +16.9 billion yen by organic
      growth, +14.4 billion yen from M&As, and +2.0 billion yen from
      foreign exchange rates.
  • The Group produced organic growth of 4.0% (constant currency
    basis) in H1 FY2018:
    • 4.7% in Japan, and 3.4% (constant currency basis) at Dentsu Aegis
      Network. The international business benefited from the strong new
      business wins in H2 FY2017; further impact from new business wins
      is expected through the remainder of FY2018.
    • Digital business contribution to total revenue less cost of
      sales
      reached 45.0% (H1 FY2017: 42.7%), including 23.9% in
      Japan (H1 FY2017:22.0%), and 60.1% at Dentsu Aegis Network (H1
      FY2017: 58.3%).
    • International business contribution to total revenue less cost
      of sales
      reached 58.2% (H1 FY2017: 56.8%).
  • Group underlying operating profit was 60.8 billion yen (H1
    FY2017: 61.9 billion yen).
    • 45.5 billion yen in Japan (H1 FY2017: 45.1 billion yen), and 15.3
      billion yen at Dentsu Aegis Network (H1 FY2017: 16.8 billion yen).
  • Group underlying operating margin was 13.7% (H1 FY2017: 15.0%).
    • 24.4% in Japan (H1 FY2017: 25.4%), and 5.9% at Dentsu Aegis
      Network (H1 FY2017: 7.2%).
    • The decline in Japan was mainly due to planned SG&A costs related
      to the working environment reforms. At Dentsu Aegis Network, the
      operating margin reflects the planned internal investment in
      global platforms and systems as well as investments to drive top
      line growth.
    • The H1 FY2018 margin is aligned to our budget and is largely on
      track for FY2018 expectations.
  • Underlying net profit (attributable to owners of the parent) and
    underlying basic EPS
    decreased by 19.8% and 19.3% respectively
    mainly due to the decline of underlying operating income and an
    increase of corporate taxes, etc.
  • Interim dividend per share was determined to be 45 yen, as
    announced in the earnings release on February 13, 2018.





Toshihiro Yamamoto, President and CEO, Dentsu Inc., said:

"In Q2 FY2018, Dentsu Group delivered the fourth consecutive quarter
of improving growth. We continue to build our own momentum in a market
which remains challenging.

The digital and technological revolution that our clients are facing
continues to provide enormous opportunity for the Dentsu Group, and we
are well positioned to take advantage of the opportunities that a
fast-changing market provides. Flexible thinking and creativity remain
at our core as we innovate across the marketing mix and deliver
long-term value for our clients.

2017 and 2018 have seen internal investment for both Dentsu in Japan
and our international business, Dentsu Aegis Network. Investments have
left the Group in a stronger position, more efficient and more
streamlined. By leveraging our enhanced infrastructure, we intend to
grow the businesses in 2019 and 2020. At the same time, for the Dentsu
Group, the term marks a vital phase for the transformation of our entire
Group businesses toward 2020 and beyond. This transformation is
essential if we are to realize sustainable growth beyond 2021 in a
rapidly changing society.

In line with this direction, we today announced the next stage in the
evolution of the Dentsu Group. We have begun to make and analysis of the
Group's holding structure going forward*, the aim of which is to ensure
that Dentsu Group's governance and organization is fit for purpose,
aligned with the demands of a fast-changing business environment and
rapidly evolving client needs.

We remain upbeat and optimistic about the prospects for Dentsu Group
in 2018 and beyond."

* Please refer to the separate press release also released today.
URL:
http://www.dentsu.com/news/release/





H1 FY2018 Consolidated Financial Results and FY2018 Forecasts

1. H1 FY2018 performance review by region

Japan:

The Group's operations in Japan produced organic growth of 4.7% in the
H1 FY2018. This was due, in part, to an increase in digital-related
services and new business wins.

Underlying operating margin in Japan declined by 100 bps to 24.4%. This
was primarily due to planned investments in the working environment
reforms.

In Japan, a range of measures have been implemented to complete the
overhaul of our in-house working environment by the end of FY2018. In Q2
FY 2018, 5.4 billion yen was allocated to working environment reforms
from the FY2018 budget of 13.0 billion yen. This was used for IT,
including RPA (Robotic Process Automation, automating basic processes)
and ICT, office environmental reform, and personnel costs. From June
2018, Dentsu Inc. introduced "Input holiday," a monthly holiday for all
employees. Thanks to these efforts, we have observed a number of
positive results that have increased efficiency across the business
resulting in a further reduction in total work hours per employee for
six months from January 2018. We will continue to build on the programs
that were successful in FY2017 and introduce further additional measures
in H2 FY2018. Dentsu in Japan is committed to the completion of
environmental/infrastructural overhaul for future growth by accelerating
the work environment reforms.

International:

Dentsu Aegis Network delivered organic growth of 3.4% in H1 FY2018 and
4.5% in Q2 FY2018. Q2 FY2018 is the fourth consecutive quarter of
improving growth and the best quarterly organic growth number since Q4
FY2016. All three regions posted growth in Q2 FY2018 with seven of our
top 20 markets delivering double digit organic growth. Our project based
businesses improved globally and showed continued momentum in the US.

Although Q2 FY2018 was our easiest comparable period of the year with
the comparison base becoming progressively tougher through H2 FY2018, we
are in line with the FY2018 guidance, low to mid-single digit organic
gross profit growth.

So far in FY2018, our new business wins have tracked behind the standout
performance of last year. The pitch pipeline is however healthy, 10%
larger than this time last year and over 85% offensive - providing
significant opportunity for the rest of the year. Our win rate in
Digital, Creative and Experiential remains at the same level as last
year; we derive 30% of our global revenues from creative work.

The Q2 FY2018 underlying operating margin reflects the seasonality of
the business and is largely on track for FY2018 expectations.
Profitability is lower year-on-year due to the planned internal
investment in global systems and platforms which remain on track. These
investments will allow the business to operate more efficiently at
scale, standardize business operations and support faster decision
making.

The investments fall into two main areas. Firstly, in robust common
platforms and systems and increased shared services. These include
people management systems and shared financial platforms. Secondly,
investments to drive top line growth. These investments include our
proprietary Growth Platform, the rollout of Salesforce, investments in
data product development including M1 and an upgrade to NEON, an
internal collaboration platform available across our entire Network.

Regions

In EMEA, Dentsu Aegis Network reported 3.9% organic growth in H1 2018
and 4.8% in Q2 FY2018.
The region continued its positive growth
trajectory, although performance across the region was mixed. Russia,
Spain and Italy posted stand-out performances in the quarter, all
delivering double digit organic growth. France and Germany remain in
negative territory. The UK posted positive growth.

In the Americas, Dentsu Aegis Network reported 5.5% organic growth in H1
2018 and 6.5% in Q2 FY2018.
Q2 growth is the strongest result for
the region for 13 quarters. Momentum remains with the business, the
benefit of new business wins from H2 FY2017 will impact the third
quarter. Both the US and Brazil showed continued strong performance.

In the APAC region (excluding Japan), Dentsu Aegis Network reported
(0.9%) organic growth in H1 FY2018 and 0.8% in Q2 FY2018.
Q2
FY2018, saw the region return to growth; but we expect a number of one
off factors to weigh on the region's growth in H2 FY2018. China remains
in negative growth and although performance improved from the previous
quarter; the market does face tough comparables in H2 FY2018. India
posted double digit organic growth in the second quarter and Australia
showed a strong result.

Acquisitions

To date in 2018, we have signed nine new acquisitions across the
Americas and EMEA. The pipeline is strengthening and we remain focused
on purchasing high growth, quality businesses at the right multiples.
Prior year acquisitions continue to perform well.

Dentsu Aegis Network continues to accelerate its strategy through
acquisitions, motivated by growing scale, geographic and capability
in-fill and innovation with a focus on digital capability including data
and CRM, customer experience and performance marketing.



2. Outlook & Forecasts for FY2018 full year performance

Outlook for FY2018

Our performance for the H1 FY2018 was in line with the financial
forecast announced on February 13, 2018. However, there were some
changes to the FY2018 Consolidated Financial Forecasts*, which now
reflect expected gain on sales of shares of associates in Japan to be
recorded in Q3 FY2018, a recording of loss on revaluation of earnout
liabilities and M&A related put option liabilities due to favorable
performances in acquired overseas companies while taking into
consideration the impact on corporate taxes. There was a change only at
net profit (attributable to owners of the parent) in the table below
from 61.6 billion yen in the initial forecasts to 79.5 billion yen in
the revised forecasts. There is no change for the planned interim
dividend per share.

* Please refer to the separate press release also released today.
URL:
http://www.dentsu.com/news/release/

 

FY2018 Revised Forecasts (vs. FY2018 Initial Forecasts
announced in February 2018)

 

Consolidated Group
(million yen)

 

2018
Jan-Dec
Revised
Forecasts

 

2017*
Jan-Dec
Actual
Results

 

YoY*
change, %

 

Constant
currency
basis, %

     

2018
Jan-Dec
Initial
Forecasts

Revenue 1,006,900 946,225 6.4 - 1,006,900
Revenue less cost of sales 954,700 877,622 8.8 7.2 954,700
Japan 366,600 361,902 1.3 1.3 366,600
International total 588,100 516,052 14.0 11.2 588,100
Underlying operating profit 150,000 163,946 (8.5) (9.5) 150,000
Japan 72,500 88,801 (18.4) (18.4) 72,500
International total 77,500 75,146 3.1 0.9 77,500
Operating profit margin 15.7% 18.7% (300) bps (290) bps 15.7%
Japan 19.8% 24.5% (470) bps (470) bps 19.8%
International total 13.2% 14.6% (140) bps (130) bps 13.2%
Underlying net profit 99,800 107,874 (7.5) - 99,800
Underlying basic EPS 354.03 yen 381.58 yen (7.2) - 354.03 yen
Operating profit 112,900 137,392 (17.8) - 112,900
Net profit 79,500 105,478 (24.6) - 61,600
JPY/USD rate** 110.9 yen 112.2 yen (1.2) - 110.9 yen
JPY/GBP rate**   153.4 yen   144.5 yen   6.2   -     153.4 yen

* IFRS 15 "Revenue from Contracts with Customers" is applied on the
previous-year results and their figures are adjusted.

**
Estimated exchange rates adopted in FY2018 revised forecasts and FY2018
initial forecasts are based on average exchange rates in January 2018.
Actual exchange rates in FY2017 are annual average exchange rates in
2017.

Note: Underlying net profit, Underlying basic EPS and Net profit:
Excluding attribution to non-controlling interests.





Further information

Further details of these results, including all related financial
statements, can be found in the Investor Relations section of the Dentsu
Inc. website: http://www.dentsu.com/ir.

Definitions of "underlying" and "EBITDA"

  • Underlying operating profit: KPI to measure recurring business
    performance which is calculated as operating profit added with
    amortization of M&A related intangible assets, acquisition costs,
    share-based compensation expenses related to acquired companies and
    one-off items such as gain/loss on sales and retirement of non-current
    assets and impairment loss.
  • Operating margin: Underlying operating profit divided by
    Revenue less cost of sales.
  • Underlying net profit (attributable to owners of the parent):
    KPI to measure recurring net profit attributable to owners of the
    parent which is calculated as net profit added with adjustment items
    related to operating profit, revaluation of earnout liabilities / M&A
    related put-option liabilities, tax-related, NCI profit-related and
    other one-off items.
  • Underlying basic EPS: EPS based on underlying net profit
    (attributable to owners of the parent).
  • EBITDA: Operating profit before depreciation, amortization and
    impairment losses.
 

Reconciliation from underlying to statutory operating profit in
H1 FY2018

 
Consolidated Group (million yen) – reported on an IFRS basis   H1 FY2018   H1 FY2017*   Change, %
Underlying operating profit 60,862 61,970 (1.8)
Adjustment items: (20,329) (19,047) -
Amortization of M&A related intangible assets (17,516) (16,258)
Acquisition costs (523) (743)
Share-based compensation expenses related to acquired companies (2,071) (1,473)
One-off items (219) (573)
Gain (loss) on sales and retirement of non-current assets (90) 629
Impairment loss - (689)
Others (129) (513)  
Statutory operating profit   40,533   42,923   (5.6)

* IFRS 15 "Revenue from Contracts with Customers" is applied on
the previous-year results and their figures are adjusted.

 
 

Quarterly results

 

Consolidated Group
(million yen)

 

2018
Apr-Jun

 

YoY*
change, %

 

2018
Jan-Mar

 

YoY*
change, %

Revenue 239,546 11.6 242,107 5.7
Revenue less cost of sales 219,073 10.4 226,665 6.1
Japan 84,059 8.4 102,340 1.9
International total 135,099 11.6 124,385 9.8
Underlying operating profit 28,118 16.1 32,744 (13.3)
Japan 15,100 24.5 30,439 (7.9)
International total 13,014 7.5 2,309 (50.8)
Operating profit margin 12.8% 60 bps 14.4% (330) bps
Japan 18.0% 230 bps 29.7% (320) bps
International total 9.6% (40) bps 1.9% (210) bps
Underlying net profit 13,619 (13.9) 17,972 (23.7)
Operating profit 18,139 26.5 22,393 (21.7)
Net profit (1) - 10,788 (30.9)
EBITDA   32,865   15.0   37,022   (13.1)

* IFRS 15 "Revenue from Contracts with Customers" is applied on
the previous-year results and their figures are adjusted.

 
 

Quarterly organic growth for the Dentsu Group, Dentsu in
Japan, and Dentsu Aegis Network

 
    Dentsu Group Total   Dentsu in Japan   Dentsu Aegis Network Total
2018   2017*   2016* 2018   2017*   2016* 2018  

2017*

  2016*
Q1 (Jan – Mar) 2.1% 3.7% 4.1% 1.9% 4.3% 3.6% 2.2% 3.1% 4.5%
Q2 (Apr – June) 5.9% (4.6%) 10.0% 8.4% (7.6%) 13.4% 4.5% (2.7%) 7.2%
H1 (Jan – June) 4.0% (0.4%) 7.2% 4.7% (1.1%) 8.5% 3.4% 0.1% 6.0%
Q3 (Jul – Sept) - (2.1%) 3.0% - (4.8%) 0.9% - (0.2%) 5.2%
Q4 (Oct – Dec) - 2.8% 4.1% - 5.5% 1.4% - 1.2% 5.8%
Fiscal Year   -   0.1%   5.1%   -   (0.3%)   4.5%   -   0.4%   5.7%

* IFRS 15 "Revenue from Contracts with Customers" is applied on
the previous-year results and their figures are adjusted.

 
 

Quarterly organic growth figures of Dentsu Aegis Network by
region

 
   

Dentsu Aegis Network
EMEA

 

Dentsu Aegis Network
Americas

 

Dentsu Aegis Network
APAC

2018   2017*   2016* 2018   2017*   2016* 2018   2017*   2016*
Q1 (Jan – Mar) 2.7% 5.8% 10.7% 4.6% 0.6% (2.0%) (2.9%) 4.5% 5.2%
Q2 (Apr – June) 4.8% (0.3%) 5.0% 6.5% (4.1%) 2.4% 0.8% (3.8%) 16.8%
H1 (Jan – June) 3.9% 2.9% 7.6% 5.5% (2.0%) 0.3% (0.9%) (0.2%) 11.5%
Q3 (Jul – Sept) - 5.9% 5.0% - (2.0%) 5.4% - (5.5%) 5.3%
Q4 (Oct – Dec) - 1.3% 7.5% - (0.0%) 4.4% - 2.6% 5.6%
Fiscal Year   -   3.1%   6.9%   -   (1.5%)   3.1%   -   (0.6%)   7.9%

* IFRS 15 "Revenue from Contracts with Customers" is applied on
the previous-year results and their figures are adjusted.

 

About the Dentsu Group

Dentsu is the world's largest advertising agency brand. Led by Dentsu
Inc. (TYO:4324, PINX:DNTUF), a company with a history of 117
years of innovation, the Dentsu Group provides a comprehensive range of
client-centric brand, integrated communications, media and digital
services through its ten global network brands—Carat, Dentsu, dentsu X,
iProspect, Isobar, mcgarrybowen, Merkle, MKTG, Posterscope and Vizeum—as
well as through its specialist/multi-market brands. The Dentsu Group has
a strong presence in over 145 countries and regions across five
continents, and employs more than 60,000 dedicated professionals. Dentsu
Aegis Network Ltd., its international business headquarters in London,
oversees Dentsu's agency operations outside of Japan. The Group is also
active in the production and marketing of sports and entertainment
content on a global scale. www.dentsu.com

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