FY2018 First-Quarter Results Conference Call

Transcription

1 FY2018 First-Quarter Results Conference Call Date: May 15, 2018 Participants: Yushin Soga, Director & Executive Officer, Dentsu Inc., Jerry Buhlmann, CEO, Dentsu Aegis Network Nick Priday, CFO, Dentsu Aegis Network <International Business Performance> Q: You obviously had strong growth in the US due to new business, but how about China? All of the agencies seem to be struggling a bit in China. A: With relation to the US, the business is going strongly. It s not really just about new business, but we have new strong management in the Americas. In relation to China, it is much more of a challenge. There are effectively three client segments and two business segments. Regarding the client segments, the dynamics we re seeing there at the moment is that Japanese clients are not particularly growing. We think to some extent that may be a timing issue; not a relation to client wins or losses. Western clients are spending reasonably well. And local clients are spending less too. As for the business segments, there are 1)Tencent and Alibaba, and 2)everything else., and at the moment, agencies in general are more exposed to the second segment. And our strategy is that we re more up-weight in our ability to advise and support clients around e-commerce on those two major platforms. We have new leadership in China as well. It is a short-term challenge. Q: APAC and EMEA, you re having difficulty in seeing signs of recovery. So there could be some risk in terms of growth, especially in the second half of the year? 1

2 A: I think one aspect of Europe is that it s really a compilation of very different regions and very different markets. So it s difficult to read from the overall number. But what I ll also say is that in 2017 Europe was our fastest growing region. So I m not unduly concerned about Europe. In China we see that as more of a challenge. But I wouldn t align the challenges we face in China with Europe. Q: With regards to the international organic growth your plan is between 3 and 5%. In the first quarter, it was only 2.2%. So going forward, at what timing and what speed can we see this improve? A: The full-year guidance, which remains unchanged following our Q1 results, is 3 to 5%. We expect an uplift in organic growth over the remaining quarters of 2018 firstly because of the strength of our new business momentum. Particularly the new business which we secured in Q4 of last year and Q1 of this year will start to have increasing impact from Q2 onwards. And secondly, our comparatives in 2017, Q2 in 2017 saw a sharp slowdown. So we expect our performance in terms of organic revenue growth to be impacted, not surprisingly, by our comparatives. Q: You have been enjoying consecutive improvement in organic revenue growth ex-japan over the last three quarters. So does your guidance for the rest of this year then look a little bit conservative if it s just sort of driven by net new business and comparatives helping you later this year? A: I think we found our guidance in 2017 seems to be overly optimistic. And therefore we think we ve taken a balanced view in terms of reiterating our guidance today for the full year. Q: On future new business, could you enlighten us as to what you think of the new business environment now in terms of how much is available potential new business up on last year, and who s defending the most and who is defending the least? 2

3 A: We think the amount that we ll pitch this year is probably two times the volume we saw in total last year. But I don t think any of that is strategically important; I think it s just a case of when contracts come up for renewal. From our perspective, the majority part of our defending this year in retaining the Microsoft contract. Now 80% of the pitches we re involved in are upside, with only a small minority defensive. In relation to where those pitches are coming from, primarily they are WPP and Publicis. Q: How have you analyzed the reason of maintaining the Microsoft business? And if possible, in comparison to the past, the impact amount-wise, has increased or remained the same? A: In relation to Microsoft, I m not going to go into the specifics of that. But what I would say is we won that review because of the strength of our strategy, our consistent global capability, and our ability to deliver innovation or add value to Microsoft. So it s a great partnership and we re looking forward to support their business going forward. Q: With regards to organic growth for international business, for consecutive quarters, you have maintained a positive trend, but compared to the competing mega-agencies, it is on an average level. Do you see any improvement of One P/L as an operating model? And as a consequence, can you far outperform the competitors as far as organic growth? Is there a time schedule that will enable for you to do that? A: In terms of the question around growth, clearly the disruptive factors that impacted the sector last year, impacted us a similar amount. We have maintained the strong growth that we achieved up to 2016, so, we were against very high comparatives compared to our competitors in 2017 We are happy with the results so far, against our best performing quarter last year, so 3

4 it s a tough comparative. As we develop more shared services and create more global platforms, having a One P&L system that works extremely effectively is a competitive advantage. And we invested heavily in, which has driven our business to be predominantly so 60% of our revenues come from digital is now in our view moving towards a data phase, where the ability to deliver data symmetry across the whole marketing value chain is a competitive advantage. For the longer term, it is our intention to outgrow the market, and we anticipate we will do that this year and for the longer term. Q: For three successive quarters, operating margin of the international business is expected to decline. Is this only because of the investment and this is a one-off phenomenon? And that in and after 2019 that recovery of operating margin will begin? Or in comparison to existing client business, is the margin lower for the newly won business? A: The margin decrease is entirely purposeful. Those are primarily around systems and platforms, but also very specifically into our data platform, which we see as a part of the business that s going to bring significant competitive advantage at the moment as demonstrated by a very good new business run in And we do anticipate that the margin will recover on an ongoing basis from In relation to the question around the negotiation fees for new clients, we do not in any way or form discount especially our fees for new clients. What we ve learned over many years is that clients make a decision on who they want to work with and evaluate the service which an agency delivers to them. Q: IT-related investment for future growth, will there be front-loading in Q1 and Q2 and lighter investment for IT in Q3 and Q4? Which quarter or which half will be the peak in terms of expense? A: Phasing of IT-related expenditure is phased quite consistently across the quarters, covering such areas of investment in cyber security, which is important for all 4

5 businesses; data privacy in government; but also the systems and platform that includes the rollout of the global IT platform, the rollout of the global people platform, the rollout of the global sales and growth platform. We expect to see the benefits of that system and platform deployment from 2019 onwards, and that will contribute towards guidance around margin and improvement in 2019 and 2020 and beyond. Q: You said that the margin will recover from So is your investment in platforms a one-off nature in 2018? And then after that the cost will go back down? Or is the cost you put in recurring and the margin expansion in 2019 comes from benefits from your investment? A: In terms of the point around the margin recovery, clearly there is investment in people and in systems which is diluting the margin. But we anticipate direct revenue uplift as a consequence of that coming through strongly in So we are very confident that as we go through 2019 and 2020, we ll increase the margin. Q: How much do you anticipate margin recovery? A: It is premature to speak about the specific number. It will be more visible around the end of <International Business Business Environment> Q: On GDPR, most agencies have said so far that they re ready. But a lot of agencies, value-add service is their data offering. But might you get less data from consumers? A: We have something like 45 lawyers employed that are focusing directly on GDPR around the Group. We have data compliance officers in every single key market. And we ve adopted a strategy of ensuring that we are basically compliant to GDPR on a global basis. So we are very confident of our position in detail and with full resources and with policies we see around GDPR. Q: On Facebook s data handling practices coming under increased scrutiny. Are you 5

6 seeing in your business any effects either in terms of cost per thousand pricing across the industry or the way allocation of budgets are changing or any analytical requests that you re receiving operationally? A: There is no downturn in terms of client spend; there s no lack of appetite for using Facebook as their communication channel for engagement with consumers; and there s no change in pricing. Q: It seems more and more clients go directly to media for the campaigns and actually bypass the agencies. Is there any difference by geography? A: We are seeing no material change in terms of clients going direct. From time to time, we do see clients buying such as out-of-home packages. But in general, agencies still add very significant value to clients, and most clients recognize that. And so I don t see any particular trends toward them buying media directly. Q: Amongst your traditional competitors, we are witnessing some players saying that they want to bring together creative media, digital, consultancy work all together. So I m just wondering how you re positioning yourself against these offers. A: There is always talking in the market about re-bundling. What I do see is some trend towards integration and where there are opportunities, client consider integrating different capabilities, and that probably has some validity for some businesses in some sectors. But I m not seeing it as materially affecting the pitch environment, where there is still significant discrimination between different specializations, and many clients also looking to ensure they get the best services from whoever provides it. We have been operating with a One P&L system for over 5 years now. Therefore, we are able to offer a range of integrated services pretty seamlessly. Let me add a few comments on the Japanese market. In all regions, business 6

7 transformation is demanded. In Japan where mass media is relatively still strong, the necessity for business transformation is on the increase. The speed of business transformation will accelerate, and the quality will deepen in terms of the depth. We recently acquired Data Artist, an AI company. Leveraging on such initiatives, working together with clients is now our new key word as we launch new types of businesses. A: Do you see consultancies as making inroads around media buying and planning? Q: I don t see them materially at this stage moving into media planning per se, at the moment most of their focus and effort is around managing pitches and advising clients around pitches. I think the fact that Accenture hired somebody who s good at media planning and buying, I m not sure it s material. They are advising clients on how they restructure their businesses in relation to marketing services. Q: I think recently you swapped out some stakes and assets with WPP, where you had some joint ventures. Just wondering if there s any similar assets or similar ventures that you have, sort of where there could be a swap of assets to come through. A: Prior to the Aegis acquisition, we used to have a joint venture business with WPP in particular in Asia, that remained as a legacy business. But on this occasion, we have conducted a swap and basically resolved this business. This has kind of been cleared. And the numerical impact of this transaction is almost nil. <Japan business> Q: What is the top-line outlook? Most recently, TV spots are bearish and demand seems to be slowing down. How do you view the April-June quarter in terms of domestic advertising spend? There would be contribution from FIFA World Cup games. A: In Q1 turnover due to TV spots and some business bearishness declined. Other businesses supported. This healthiness is sustainable until the end of the year. On 7

8 ad-spend, our internal consensus is growth of 2% YoY for the Japanese ad-spend. And in the months ahead, there will be the FIFA World Cup games. And also in the run-up to the 2020 Tokyo Olympic and Paralympic Games we are expecting some execution-related spend. So for fiscal year 2018 in general, we think that the original budget is comfortably achievable. And to what extent is there an upside against the budget, which we are studying internally. Q: On slide 25 of the document, it talks about the domestic digital domain and the turnover and revenue less cost of sales. But at the operating profit level, what would be the level? A: At this point in time, and we cannot tell you specific numbers. But I don t think the operating margin of digital business is much lower than other businesses. Q: You have been talking about an annual budget of 13 billion yen for the Working Environment. But if we look at the reduction of profit against the full-year decline of 18%, Q1 was a drop of 8%. So does that mean that there has not been a front-loading of expenses and more expenses shall be incurred in Q2 and Q3? A: Against 13 billion yen, so far we spent about 2.5 billion yen, so it s slightly below a quarter of the full-year budget. That does not mean that we are postponing working environment reform and deferring it until the next fiscal year. We believe that the top-line numbers are quite sound, and as we had budgeted, we will be expending the costs for structural reform in the remaining months as planned. [End] 8