Strategy

International business 3

CFO, Dentsu Aegis Network Nick Priday

Consistently strong financial performance

Following Dentsu’s acquisition of Aegis in March 2013, the financial performance of Dentsu Aegis Network has been very strong. This is demonstrated by high levels of both revenue growth and profit growth over that period. In the three years from 2013 to 2016, at constant exchange rates, revenue has grown by 55% and underlying operating profit has grown by 60%, or an average of 20% per year.

The growth in our revenue over this three-year period has been driven by sustained and consistent market-leading organic revenue growth, complemented by targeted acquisitions which add talent, leadership, best-in-class capabilities and scale to ensure we can continue to best meet the needs of our clients. In fact, the contribution to our revenue growth from organic and inorganic means over the period it is split almost exactly 50:50. Organic growth exceeded acquisition growth in 2014 and 2015, with acquisition growth being higher in 2016, a year in which we continued to deliver market-leading organic revenue growth at 5.7%.

Demonstrating strategic intent and effective capital utilization

We set out at the beginning of 2016 to show real strategic intent around our M&A strategy. This was because the market that we operate in, and the market that our clients operate in, is changing rapidly and we wanted to continue to show strong strategic leadership in that market context.

This requires the effective utilization of our capital. Dentsu Inc. and Dentsu Aegis Network each have robust balance sheets in their own right, but on a consolidated Group basis, we are in a position of strength from which to pursue our strategic priorities. Consistent with our strategic intent, we signed 45 deals relating to acquisitions and investments in 2016, 35 of which were new acquisitions. The average deal size doubled, even excluding the Merkle deal, as we really focused on executing against key strategic priorities. We spent over £1.1 billion on these new acquisitions and investments, as well as on earn-out payments relating to prior period acquisitions. Our acquisitions clearly help us to accelerate progress against our strategic goals but they also deliver strong financial returns for our shareholders. We have a good track record on M&A over the longer term. Going back over the last ten years, acquisitions have averaged a post-tax return on invested capital of 13.7%, significantly above our post-tax weighted average cost of capital.

The acquisition of Merkle is the largest deal that the Dentsu Group has completed since the formation of Dentsu Aegis Network and provides many important strategic benefits that have been outlined above. The combined proposition is compelling and will become increasingly compelling as the digital economy grows. The broader integration of Merkle has progressed very well and in line with our plans.

Importance of good cash and working capital management

In the context of a changing market and our intent to continue to show strategic leadership, it is important we continue to focus on ensuring consistently good cash and working capital management across our Group so that we can continue to invest with confidence – whether in M&A opportunities, colocating our client facing brands in common office space to promote collaboration and integration, or in technology, platforms and systems. We will certainly need to continue to invest in our business to deliver against ourstrategic goals for 2020 and beyond.

We reported a strong cash and working capital performance in 2016 with operating cash flows exceeding operating profits as a result of a modest working capital inflow in the year. Looking forward, we have introduced a cash metric to the financial performance element of the senior management bonus scheme from 2017, intended to incentivize and reward strong cash management practices across our businesses.

Investment in common platforms and systems

The market continues to change and become increasingly complex. That complexity provides opportunities for us to grow our business but with complexity comes cost. We need to continue to address the cost of complexity by standardizing and improving our end-to-end processes and developing common platforms and systems from which to manage our business.

Just as we recognize that quality data is a source of competitive advantage for our clients, so it is too for us as a business. We will therefore continue to make investments in our finance and people systems and technology platforms more generally, which will provide consistent, timely and robust business information and data sets to enable us to better manage our business.