Performance 2016_Dentsu Integrated Report 2017

Performance 2016Message from the CFO: Fiscal 2016 Results and Fiscal 2017 Outlook

Shoichi Nakamoto Representative Director and Senior Executive Vice President & CFO

Representative Director and
Senior Executive Vice President & CFOShoichi Nakamoto

International business is growing rapidly. Japanese business is aiming for new growth through reforms.

Fiscal 2016 Results

Core Japan business progressed steadily, while international business grew rapidly and outpaced market growth and competitors.

In fiscal 2016, consolidated earnings were robust in our Japan business, while the Dentsu Group’s international business grew at a rate that substantially outpaced that of competitors.

Japan business saw a gross profit of ¥363.2 billion (up 4.3% year on year,* with organic growth up 4.5%). This was due to an improved gross profit margin at the parent, as well as contributions from domestic Group companies. The underlying operating profit** in Japan was ¥97.3 billion, up 7.7% year on year.

In international business, dealings involving existing clients expanded, and we steadily won new accounts. In addition, we conducted mergers and acquisitions to help increase competitiveness and acquire the resources necessary to create a platform for future growth, such as the acquisition of the Merkle Group Inc. (Merkle), based in the US. As a result, the gross profit of our international business concerns in fiscal 2016 was ¥426.0 billion (up 2.9% year on year, with organic growth up 5.7%) despite the effects of currency translation. The growth rate excluding currency translation effects was 18.1%. By region, the Americas grew 28.9% year on year, EMEA (Europe, the Middle East and Africa) rose 12.6%, and APAC (Asia Pacific, excluding Japan) rose 12.2%. All regions maintained strong momentum and outperformed market growth. The underlying operating profit for our international business was ¥69.0 billion (down 1.6% year on year), but up 11.2% excluding currency translation effects.

Key Measures for Fiscal 2017

We will establish a platform for sustainable growth through drastic reforms of our Japan business. We will accelerate growth through strengthening and expanding the competitive base of our international business.

The Dentsu Group has implemented various measures to achieve its medium-term management plan. As a result, even given the recent effects of currency translation, at the end of fiscal 2016, earnings on the whole reached levels initially targeted for fiscal 2017.

Meanwhile, we are still developing working environment reforms in our Japan business, to resolve structural issues such as long work hours (please see Responses to Labor Issues in Japan for details). In fiscal 2017 we plan to focus on resolving structural issues, the root cause of many of our concerns, and reforming our Japan-based business as quickly as possible. In fiscal 2017, we plan to invest a total of ¥7.0 billion, comprising about ¥2.5 billion in human resource reinforcement at the parent company; some ¥3.0 billion in digitalization and IT to reduce and streamline labor; and ¥1.5 billion in office facilities. We consider these investments necessary to improve productivity over the medium term, and are working to evolve our Japan business and become a leader that establishes new work styles.

In our international business, while keeping an eye on changes in the macro environment and appropriately identifying various risks, we plan to maintain and increase the growth momentum. In 2016, the Dentsu Group acquired Merkle, one of the largest independent CRM service companies in the US. We will continue to promote strategic and proactive mergers and acquisitions (M&As), which can lead to growth opportunities. We will combine these moves with our established ability to identify changes in business activities and consumer behavior. In addition, we aim to uncover business opportunities at existing clients and win new clients by proposing creative and unique solutions that integrate newly acquired capabilities with our established competencies in consumer insights, creativity, and technology.

Capital policy and dividends

Our top priority is to continue investing in growth domains in the pursuit of sustainable profit growth. Further, we plan to steadily enhance capital efficiency in order to provide our shareholders with comprehensive returns and improve ROE over the medium term. We will achieve this by combining long-term improvement in shareholder value through business growth, together with ongoing and stable dividend payments, as well as flexible share repurchases.

For the fiscal 2016 dividend, we decided to pay out ¥85 per share, with an interim dividend of ¥40 and a yearend dividend of ¥45. The decision was made after careful consideration of the current fiscal year’s operating results; the medium- and long-term performance forecast; and our financial status, bearing in mind future investment plans and our financial soundness. Your continued understanding and support for the Dentsu Group’s management is highly appreciated.

* Year-on-year refers to comparisons between the current consolidated accounting year (January 1, 2016 – December 31, 2016) and the same period of the previous year (January 1, 2015 – December 31, 2015). For the Company and consolidated subsidiaries with fiscal years ending in March, the period included for consolidation is between January 1, 2015, and December 31, 2015. For consolidated subsidiaries with fiscal year-ends in December, the consolidation is also January 1, 2015, through December 31, 2015.
** Underlying operating profit is a KPI to measure recurring business performance which is calculated as operating profit less on-off items, such as amortization of acquisition-related intangible assets, M&A-related expenses, impairment losses and gains/losses on sales of non-current assets.