Dentsu Group Inc

Welcome to the Dentsu 2023 Third Quarter Earnings Call. This is a reminder that today's call is being recorded. This call will be held in Japanese and English with simultaneous translation for those joining online. Please choose your preferred language from the bottom of the Zoom screen. For those joining on the telephone line, you will only be able to hear the original language spoken. Today's presentation materials are available on the Dentsu Group website. Joining me today are CEO Dentsu Group Inc. Hiroshi Igarashi.

Igarashi de gozaimasu. Yoroshiku onegai itashimasu.

CFO, Dentsu Group Inc., Nick Priday.

Hi, everybody. Nick here.

CEO, Dentsu Americas and Global President, Data and Technology, Michael Komisinski.

Hi, everyone. It's Michael here.

CEO, Dentsu Japan, Norihiro Kuretani. The agenda for today will start with business update from CEO Hiroshi Igarashi. CFO Nick Priday will then present the financial update followed by CEO's strategic update from Hiroshi Igarashi. We will invite you to ask questions after the presentations. Mr. Igarashi, please go ahead.

This is Igarashi. Good evening and thank you for joining our Q3 earnings call today. I would like to go over the third quarter highlights first. In the third quarter, we continued with are one then to implementation which will allow us to better serve our clients, offering larger, more impactful, integrated growth solutions to grow our clients' businesses. Against a difficult trading backdrop, in the third quarter, the group reported net revenues of plus 1.6%, but with organic growth of minus 6%. Our performance continues to be impacted by the reduction in spend from our technology and finance clients, and we expect no significant change to spend into the year-end from these sectors. We also saw some client losses in customer transformation and technology, CT&T, as well as a reduction in scope of some of the larger transformational projects as clients delay spend. CT&T reached 33% of group revenues. as we continue to grow our revenues in this space in line with our stated strategy of reaching 50% of net revenues over time. Moving to our highlights of the third quarter. We are proud to announce the expansion of our Kraft Heinz relationship. We are now agency of record into the U.S. market three years after winning the international media relationship. We are awarded the Papa John's US media account and recently won enterprise cars as well. In Japan, there were several new media and creative wins from clients in the service, technology and telecoms and entertainment sector. as well as new wins in business transmission and branding projects in CT&D from clients in manufacturing food and beverage and technology and telecoms. Our investments in AI continue. InWorld AI is another pillar in Dentu's AI strategy for clients, driving AI-powered consumer brand interactions across gaming, entertainment, sales, marketing, training, and education. In sustainability, we launched a decarbonization program initiative for marketing to reduce GHG emissions in marketing supply chains. We have signed a contract with Adgreen to develop globally standard tools for this. We are also continuing to invest in upskilling our global workforce in sustainability for the benefit of our business clients and partners, with 102 employees completing the Cambridge Institute for Sustainability Leadership. Our long-term partnership with P&G was recognized as we received recognition with the P&G Supplier Excellence Awards in both the U.S. and Italy. Dentsu Group also won a Grand Prix at the Mad Stars Awards held in Busan, Korea in 2023, and Dentsu won Agency of the Year and Design Company of the Year awards in Asia in the London International Awards. I will now hand over to Nick to talk us through the financials. Thank you.

Thank you, Igarashi-san, and hello again, everybody. This is Nick Priday, and I will now update with our financial performance for the third quarter and nine-month results, as well as providing the outlook for the full year at the end of this presentation. So I will start with our key metrics. In the three months that represent the third quarter, organic revenue decline was minus 6%, lower than we reported in the second quarter, and this is due to a weaker trading environment with a number of impacts. Firstly, we saw continued conservatism from clients in the technologies and financial services sectors. Secondly, CT&T saw reduced project scope and delays in client spend. And thirdly, we were also impacted by client losses from prior quarters and weaker than average new business momentum year to date. The group operating margin was down 180 basis points year on year. However, we did see sequential improvement in our margin from the previous quarter. The third quarter margin was impacted by further charges within the DAC cluster. Excluding these charges, the third quarter margin would have been broadly flat year on year as cost mitigation continues to be enacted to reduce the impact of the revenue declines. As a result, principally of the weaker trading, underlying basic EPS is 62 yen for this quarter. The next slide shows the main items representing our nine-month profit and loss. Net revenues increased by 2%, 807 billion yen, despite the organic decline. Acquisitions and foreign exchange had a positive impact on reported revenue growth. Underlying operating profit was 98 billion yen, down 26% year on year, and operating margin was down 460 basis points. This represents an improvement from the first half given stronger margins in Japan and the Americas, although EMEA and Asia-Pacific reported lower margins year on year as a result of weaker than expected trading. The lower than expected trading performance in Q3 means it has been harder to manage costs in line with revenue in these two regions. For the nine months to the end of September, the impact of DAC represents 100 basis points of the 460 basis point decline in margin. Underlying net profit was 51 billion yen, and the statutory operating profit is lower year on year, largely due to the impact from asset sales in the prior year, which do not repeat in this current year. Next, I would like to talk about customer transformation and technology, our strategic focus for the group. We remain committed to reaching 50% of net revenues from CT&T over time. In this regard, we continue to diversify and expand our revenue mix and capabilities through acquisitions, leveraging our strong financial position and healthy balance sheet. CT&T in Japan remained strong, reporting double-digit growth at the nine-month stage, whilst trading was weaker in the other regions. The acquisition of TAG brings exciting new capabilities to the group, complementing our existing offer in both CT&T as well as media and creative. And our recent Omega and Pexlify acquisitions also reported double-digit growth in Q3. Turning to our regional view, while Japan continued to report solid growth in the third quarter, Americas, EMEA and Asia-Pacific all reported organic revenue declines. Amongst our largest markets, Canada, Denmark, the Netherlands, Norway, Spain and Taiwan reported positive growth for the nine-month period. Japan, our largest region at 41% of group revenues, continued to achieve solid organic growth in Q3. CT&T continued to lead growth in our Japan business, maintaining double-digit improvement for the nine-month period. In particular, the third quarter saw strong growth of over 20% in business transformation, Dentsu's consulting services, and improvement quarter-on-quarter. Advertising was largely flat in Q3, with some client weakness in TV spot, while TV time advertising remained robust. FMCGs, in particular cosmetics, performed well, and beverages were stronger than usual. Moving to the Americas, despite continued client caution in the Americas, revenue has largely stabilised over the past two quarters. The US market continues to report organic revenue decline, although Canada reported over 2% organic growth in the third quarter. Media revenues were impacted by client budget reductions earlier in the year and client losses in previous quarters. The trading environment for the North American CT&T business does remain challenging, with no trend changes versus what was seen earlier this year. The sales cycle remains extended, and we have seen clients reduce the scope of some larger transformational projects. We continue to expect these effects to be cyclical in nature, although it may take some further time to recover. Creative remained positive in terms of the growth they delivered due to expanding remits from existing clients and new business wins. EMEA reported nine months organic revenue decline of close to 10%. In the second quarter, EMEA performance was impacted by the DAC cluster, with the results adversely affected by a complex business transformation and systems integration, including project management, people, and finance systems. The issue came to light late in the second quarter, and during the third quarter, we have undertaken additional work. This has resulted in further true-ups, principally related to income and profit previously accrued. We have now fully reviewed the root causes and identified remediation actions as necessary. No further adjustments are contemplated in Q4 or subsequent periods. In the third quarter, the EMEA region had a prior year comparable of over 15% organic revenue growth, and against this backdrop, Media and Creative both reported organic revenue declines in Q3 of this year. CT&T saw slower pipeline conversion as the lengthening of the sales cycle began to impact this region too. In October, Andre Andrade was appointed as CEO of Dentsu EMEA and will lead the region in delivering client-centric, integrated solutions going forward. And finally, Asia-Pacific, excluding Japan, reported organic revenue decline of 8% for the nine-month period. Whilst trading has been weaker than expected, Dentsu did record the highest media new business wins in Asia-Pacific in Q3 amongst peers. Macroeconomic conditions continue to impact our China business, with clients cutting back spend. However, South Korea and Hong Kong both reported strong organic revenue growth. In Australia and New Zealand, economic uncertainty and rising inflation has driven lower consumer spending and business confidence, resulting in reduced client spend and increased project deferrals. Moving on from the regions, this next slide shows our leverage position and capital allocation policy. Our leverage at the end of the third quarter is 1.45 times based on net debt to underlying EBITDA for the last 12 months. This is after the TAG acquisition was completed, so it was elevated compared to prior year. Our leverage target remains between 1 to 1.5 times at December year-end, which is historically a low point for leverage through the year due to seasonality. Whilst management's immediate and clear focus is returning the group to organic growth, we will continue to invest to transform our business, shifting into the structural growth areas of our industry, maintaining our long-term perspective and rigorous discipline. Moving on to our full year 2023 guidance. we have lowered our organic growth outlook to circa minus 5% and lowered our operating margin target two to circa 13.5%. There are two charges that adversely impact the group's FY 2023 underlying operating profit and underlying margin. These charges relate to both severance and the charges within the DAC cluster. The Board considers both of these charges to be one-off in nature and therefore has upwardly adjusted the underlying basic EPS guidance from ¥335 to ¥390 for the purposes of our dividend calculation. The Board has also decided to accelerate the dividend payout ratio for 2023 to its long-held target of 35% one year ahead of schedule. The full year 2023 dividend per share is therefore revised to 137 yen. It's also important to note on this slide that our adjusted underlying operating margin is 15%, and this is the baseline we have for the group as we enter 2024. So as I just mentioned, the Board has accelerated the dividend payout ratio to 35%. The enhanced payout ratio will be applied to adjusted underlying basic EPS, which is guided at 390 yen as per the previous slide. And based upon this guidance and following the payment of the interim dividend of 78.5 yen per share in September, the final dividend for 2023 is now expected to be 58.5 yen per share. So in conclusion, as a group, we remain very focused on returning to organic growth and the implementation of One Dentsu will support this by removing obstacles to growth and delivering integrated growth solutions for our clients. Continued cost management remains in place for 2023 with measures such as hiring controls, lower external spending and reduced travel and entertainment costs. The group has an increased focus on driving improved profitability in 2024 by maintaining cost discipline, driving adoption of our networked talent within Dentsu Global Services and improving utilisation rates. We'll provide detailed guidance and commentary for 2024 at the year-end results announcement in February. The dividend payment and the acceleration of the payout ratio to 35% reflects the group's recognition of the importance of shareholder returns. Thank you. I'll now hand back to Igarashi-san.

Thank you, Nick. Our results in the third quarter were impacted by a continuation of many of the trends we have seen this year. And these were such as continued conservation from technology and finance clients. In customer transformation and technology, the Americas was our first region to be impacted by the lengthening of the sales cycle. and experienced some delays from clients relating to larger scale transformation projects. In the third quarter, we saw these trends also hit our businesses in EMEA and APEC. We've also been impacted by some client losses that we saw in the first half of the year. There is, however, an improving outlook. Americas has seen a stabilisation in revenues, and a stabilisation of the CT&T revenues in particular, giving cause of optimism that client investments may return next year. The rollout of our one-denser model has seen early success in the US region, and I will talk in more detail on that shortly. The TAG acquisition that was completed at the start of Q3 has generated wins relating to our integrated proposition specifically in the beverages and health sector. And we have expectations that we will see a cyclical return to spend from technology clients in 2024. Looking to the long term, our competitive differentiator remains unchanged. We will drive growth for our clients through a deep understanding of their businesses as we partner with them to deliver integrated growth solutions centred in the convergence of marketing, technology and consulting. Clients continue to prioritise speed, access to talent and integrational services. And One Dentsu allows us to deliver this by simplifying and integrating our offerings into an ecosystem which makes sense to clients, allowing us to serve them better and empower us to innovate with speed, agility and scale. Our One Dentsu model unites us as a global network. The changes we are making to improve our services to clients include adopting a client-centric accelerator model. We have invested in senior integrated account leaders and integrated strategy leaders to help our clients work through business and marketing transformation as true partners, allowing us to leverage all Dentsu capabilities to deliver integrated growth solutions for our clients. We have appointed Giulio Malegri as Global Chief Operating Officer and Chief Global Client Officer. This new, highly commercial role is key to our future growth. Furthermore, we have implemented globally aligned practices to enable a world-class end-to-end service offering to provide our clients truly integrated solutions in media, creative and CT&T. We have appointed Jean Lin as Global President, Global Practices. Jean will enhance the long-term competitiveness of Dentsu through our core competencies. This will be enabled by integrated client and market P&Ls. We will remove the financial barriers to allow for more freedom and agility. to tightly integrate our offerings, removing silos to aid collaboration in the market. And this empowers our market CEOs, those closest to our revenue, to drive growth. As we become one unified global network, Our business is increasingly supported by Dentsu Global Services and our network talent hubs that can drive efficiency and value. This will support not only costs but will drive revenues as well by delivering for our clients. Our accelerator clients are our most strategic, integrated, and prioritized accounts. This is the group of clients that leverages the One Dentsu model and the collective capabilities of the group to realize integrated growth solutions. We have codified how we manage to drive IGS through three pillars, account management, strategy and innovation, and client commercials. Our accelerator clients have a dedicated integrated client leaders with a single P&L across the group. resulting in a higher average deal size and higher global win rates. The US market has been an early adopter of the 1-2 model and we have seen early success. Under the leadership of Michael Komasinski, we have made rapid progress towards delivering our services. The US has seen revenues stabilise with a number of account wins and product launches. Alignment of capabilities enables smarter pitch prioritisation and conversions. The integrated client leadership model is delivering 50% higher win rate for accelerator clients in comparison to our wider US client base. This approach not only delivers a higher win rate, but also a larger average contract size. This is being supported by the appointment of a client growth officer to identify and deliver solutions. America's client referral scores continue to improve, reaching two-year highs and above industry average. The launch of Next Generation Mercury is turning creative media and customer experience data into integrated actions that drive growth and brand loyalty. This model will be rolled out across all regions as we focus on becoming a unified network able to best serve and grow our global clients. In conclusion, the macro environment remains challenging, but I and our new leadership team announced today have an unwavering focus on returning to growth. With 1Dentsu, we are creating a unified global network that combines client centricity with speed, agility and scale, ensuring we deliver against our clients' need for growth. The continued implementation of our One Denses strategic priorities will support our return to growth in 2024 with our positioning at the convergence of marketing, technology and consulting. I appreciate your continued support to us. And thank you. And I'll now hand back to the operator.

We will now begin the Q&A session. As a reminder, this call is for analysts and investors. Thank you. For questions, please use the raise your hand function on Zoom or press star nine on your telephone. I will ask you to unmute, then please introduce yourself. We are confirming several hands being raised. Please keep your hands raised as we are confirming your names. Thank you for your patience. Mr. Maeda from SMBC Nikko Securities, please unmute and introduce yourself.

Hello, this is Maeda of SMBC Nikko Securities. I have two questions. Can I ask the two questions together? Yes, please go ahead. The first point is regarding the DAC negative issue that was explained. And in the second quarter, Earnings School, you said that the process has been completed. What is the background of having to make this additional charge? And in the fourth quarter, may we understand there will be no longer any charges? Or is there a possibility that something similar is going to occur in the fourth quarter as well? Or is it behind us already in the fourth quarter? Please elaborate further. That's my first question. The second question is regarding the U.S. There have been client losses in the U.S., Overall, it seems that business is trending upward. However, you are losing clients. Why is this the case? Is there a structural issue in the U.S.? If such a problem exists, have you confirmed signs of trending upward? Please elaborate further on the U.S. market. Maeda-san, thank you very much. This is Igarashi speaking regarding the first question, regarding the negative impact of dark cluster. In the second quarter, the recognition was... thought to be completed, but in the third quarter, additionally, recognition had to be made. You would like to know the background of this. Furthermore, is there going to be additional charges in the fourth quarter, is what you have asked about. I would like to ask Nick, our CFO, to respond to that question. Regarding the client losses in the United States, I shall respond to that question, as well as I would like to have Michael weigh in from the Americas. First of all, Nick, please respond to the DAC issue.

Thank you, Igarashi-san, and thank you, Maida-san, for the question. Very clear. So, yeah, as you say, in the second quarter, we announced a charge relating to the DAC business, which was a result of a number of parallel transformation work streams happening at the same time, as I mentioned before that. included changes to people systems, project management systems, finance systems. And adding to that complexity, DAC is obviously a multi-country, multi-currency cluster. And the financial impact in the second quarter was really due to the misalignment of certain business processes and systems. We necessarily needed to... continue to interrogate the root causes of the systems issues within DAC during the third quarter. The issue did come up relatively late in the second quarter and we had made provisions which we had thought would be complete. But as Igarashi-san said earlier, we needed to undertake more work during the third quarter. And as you can imagine, that work has been subjected to a significant amount of management time and focus and scrutiny across management teams involved across the DAC cluster, the EMEA region and our global teams. The local team was supported by our commercial teams, our operations teams, technology teams and finance teams conducting a very thorough review. And it's as a result of that very thorough review and the fact we've now had more than four months. at the time of this announcement today to fully review the root causes and identify the remediation actions that ultimately we've determined that that work means that we need to make further adjustment further true-ups principally related to income and profit previously accrued Your question around whether or not we should expect more charges in the fourth quarter, no, that's not the case. We are now confident we have identified all adjustments and do not expect any further charges going forward. Thank you.

Thank you very much. Regarding the client losses in the U.S., as well as the trend going forward, is the question I'd like to respond to. Regarding the impact of the client loss, I would like to respond to that question. Regarding the trend going forward, I'd like to ask Michael to respond. First of all, regarding the client losses, mainly in the first half it has occurred, regarding these client losses, What we're aiming for, the integrated growth solution, meant that we had to integrate our expertise to deal with client needs. But in the first half, there have been client losses. It is because the integrated solutions did not reach the expected results the capabilities of our solution was not fully understood by the customers. That is the reason why we lost customers. But in June and onward, Michael has become the CEO of the region and he has taken on this challenge to resolve this issue. Therefore, I'd like to ask Michael to now elaborate further.

Thank you, Igarashi-san. Yeah, so as Igarashi-san mentioned, the client losses that were incurred were mostly in the second half of 22 and the first half of 23. Since then, those relationships have stabilized and we've seen much better progress on the new business front. And I would attribute much of that to the implementation of the One Dentsu model in the US region on a very accelerated timeline. It allows us to, I think, bring a stronger value proposition to our clients. It has certainly allowed us to show up more strongly in new business situations. And it's generally brought a more integrated approach to the way that we service and support existing clients. which promotes stability and longevity in those relationships. So I think in short, I think the accelerated implementation of our model has had a pretty dramatic impact on the stabilization of existing and improving our performance with new business over that time frame.

Thank you very much. So for the next question, Mr. Abe from Diver Securities, please unmute and introduce yourself.

Thank you. This is Abe from Diver Securities. I have a couple of questions. First, in regards to organic growth rate, before the adjustment and after the adjustment, What was the assumption changes on per region basis? And also, is there any impairment of risk in each of the regions? What is your view at this point in time? And the second question is to talk about the lengthening of the cell cycle extending to EMEA and APEC. But in the case of the Americas, I think the impact has prolonged. So if you take that into consideration, even when the market condition starts to recover, do we expect EMEA and APAC to continue to see difficult situation for some time still? So these are my two questions. Thank you. Thank you very much, Mr. Abe, for your question. First question, in regards to organic growth, you made an adjustment, but before and after the adjustment, based on the regions, how has the situation changed? So you wanted some explanation in regards to how the situation has changed on per region basis. And also on that backdrop, and Is there a risk of impairment in each of the regions? So that's the first question, and I would like to ask Nick to respond to that question. And in regards to the lengthening of the cell cycle, and your question in that regard was that this had kind of prolonged in U.S., and... This has now extended to EMEA and the APEC, and will this lead to a delay in recovery? And I will respond to that question.

Thank you for the question. It's Nick speaking. So in terms of the first question relating to the impact by region relating to the downgrade, as one done to, the guidance we give is at the global group level. But I think you can see from the results that we've shared today where the challenges in terms of organic growth have come in terms of the third quarter performance. which is down 6% organically. And you can see the split across the regions with Japan performing solidly in the third quarter as per the second quarter too. And so really the downgrade relates mostly to the impact which we've already reported in Q3. which is obviously lower than we'd expected, together with a general continuation of that trading environment into the fourth quarter. So the regions which contribute most to that downgrade would be the European region and the Asia-Pacific region because of the performance which we're reporting in the third quarter. In terms of the risk of any goodwill impairment for the full year, we've clearly not reported any goodwill impairment at the time of this third quarter. No impairment has been required. But we continue to need to review for indicators of impairment and will perform a full goodwill impairment test as part of our standard year-end procedures. Obviously, the determination of impairment is affected by a range of factors, including the discount rates to be used, which obviously the interest rate conditions across our regions are relevant factors in considering that, as well as business confidence in the region and the outlook for the results of our operations. So the conclusion is there that we will need to perform an impairment test at the end of the year in line with our standard year-end practices. Thank you.

So I will respond to your second question. Now, lengthening of the sales cycle that I referred to. Now, that was... mainly related to CXM, the domain. And the lengthening of the sales cycle in the U.S. has kind of expanded and starting to have impact in other regions like EMEA and APEC. And as I've indicated, we may require some time for recovery. But in the case of EMEA and APEC, not just in the CXM area, but media and creative. We still have a relatively high proportion of businesses related to those domains, and so in totality, we are hopeful of offsetting some of the impacts so that we are able to return to a recovery track in the latter half of the year. And CXM, the market condition US, as I've explained earlier, is starting to show signs of recovery now. And so towards the second half of next fiscal year, we would like to achieve overall recovery for the group. And that completes my response. Thank you very much.

Thank you very much. So for the next question, Miss Fiona Orford-Williams from Edison Group, please unmute and introduce yourself.

Good morning. Williams from Edison. Firstly, can I ask a bit more about the timing that you see on the improvements, particularly in the tech and finance areas, which you identified as being areas of concern previously, whether you see those improvements coming through in the first half of 24 or whether you see it more back end weighted? And my second question is on the client side. You've talked about your accelerated clients. What sort of scale is that in the larger picture? How many and how many could become accelerated clients? And then if you could also talk about the pipeline and the account reviews and conversion rates, that would be lovely. Thank you.

Fiona-san, thank you very much for your question. Regarding the first question, is regarding tech and finance sectors, what is the timing of the recovery? I would like to respond to that question from Igarashi. And... For the client side question, regarding the accelerated client, what kind of volume and scale is what you have asked about? And regarding the pipeline of this, as well as the conversion rate that you want to know further about the accelerated client, I will respond to that question, as well as additional comments from Michael. If... if it is possible. Now, regarding the first question regarding the tech and the finance sector, the recovery timing will be addressed. As I mentioned at the outset, currently in terms of advertising spend, as well as the, it has been curtailed for these sectors. But we believe that this trend is likely to continue until the end of the year. And for the first half of next year, I believe a certain level will continue. Therefore, we hope that there will be a recovery from the second half of next year. But having said that, for some tech companies in the second half of this year, there is a signs of recovery of advertising spends. Therefore, this could stimulate the overall sector to lead to momentum in advertising expenditure. We hope that that will be the case. Furthermore, We are conducting a CMO interview, and according to the search that we are making, the The CMOs that want to increase ad spend is around 70% or even close to 80%. That is the result of the search we have made for CMOs. So overall, we believe that ad spend can be expected to recover next year. Now to your second question regarding the accelerator client. I would like to further elaborate on the type of volume this will entail. We have prioritized global clients, and we are referring to them as accelerator clients. In particular, we are focused on 11 companies for the 11 clients. the solutions that we can provide and how we can answer their challenges. And the result of achieving solutions to their challenges, as well as what kind of revenues we can generate, are being scrutinized and analyzed. And as I have explained earlier, We have account leads that are conducting a detailed analysis so that the focus areas can be identified in making presentations. Therefore, for each client, the win rate for the presentation is higher by 50% compared to other clients. I would like to ask Michael to weigh in, possibly, with any additional comments. Michael, please.

Thank you, Igarashi-san. Yeah, it's worth noting that the client segmentation has those global accelerator clients that Igarashi-san mentioned, but also identification of about 30 regional strategic clients as well that operate with us a little more on a regional basis, as you'd expect. But the idea is to grow those around our integrated one density proposition. And if they operate with enough global scale and consistency to promote those to that global accelerator tier, where we can then build those relationships on a global basis. And the idea would be to add to those segments as much as we can as we progress relationships across the portfolio. And the idea is, again, around a more integrated account leadership structure that brings our capabilities to bear in a tighter and easier way that makes us easy to buy and allows our capabilities to solve bigger, more impactful business problems for those clients. And I think that's probably it for that.

Thank you very much. So for the next question, Mr. Kishimoto from Mizuho Securities, please unmute and introduce yourself.

My name is Kishimoto from Missile Securities. Thank you very much for this opportunity. I have two questions. The first question is related to Japan business and the progress of Japan business thus far. How have you rated this? CT&T seems to be doing well, but Adam at business. It seems that it is somewhat slower, and so that's how you have ended up with the result. But how are they performing against the plan? TV, sport, and intermediate media growth rate is lower for Japan. So what is your view for the fourth quarter as well? So that's the first question. And the second question, between Japan business and international business, I know you don't disclose margin, but the margin decline, you know, this occasion is mostly to do with international business and for Japan business. And you are maintaining the level from the past. Is that right? And the margin improvement next fiscal year, is it because of rebound of the international business? And so for Japan business, you're not expecting to see any reasons to increase margin? Is that the case? That's my second question. Thank you. Kishimoto-san, thank you very much for your question. The first question is regarding the Japan business, the progress thus far. CD&T is performing well, I can understand that, but ad business, particularly TV and Internet, the situation for those operations, how is it performing against the plan? Is it shrinking? And that was, I think, your question. And you've also asked about expectation for the fourth quarter. And I would like to ask Kuretani-san to respond to that question. And the second question was that the reduction or decline in margin So you've kind of asked as to whether the Japan business has maintained margin, and is it due to the declining margin for international business? And for next fiscal year, is there any concerns of margin declining for Japan business? And for that, I would like to ask Nick to respond. So, Craig, if I could ask you to start. Thank you for your question. Well, to begin with, for Japan business overall, as you have indicated, CT&T In the third quarter, cumulatively, we have been able to maintain double-digit growth. And for advertising business, in the first half of the year, we faced quite a tough situation. But in the third quarter, we have now started on a recovering trend. But in comparison to the expected level, the speed is a little slower. And the reason for that and for advertising business, and when we compare against last year, and the stay-at-home demand was strong for information and communication area, but for the group, this was the largest sector segment, and the recovery there was slower, or the increase in liquidity of the labor market, lack of personnel. and investment expansion into their personnel services. This was making progress at quite a fast pace. This has kind of cycled out. And so the rebound decline from these two industries were quite significant. However, in regards to these two industries, in the third quarter, we have started to see recovery trend. And so towards the fourth quarter, we expect the recovery to become even more prominent. And the ad area, the win rate against competitors for the group, and we have been progressing as for other years, and our competitiveness in this area is not something that we have any concerns about. However, when it comes to the digital ad, I just want to add a comment here. Now, as a group, and We are not seeking the increase in turnover, ignoring profitability. And so our group has strength in the connected TV or retail media. And within the digital ad market, these are the segments where the growth speed is quite fast. And in those areas... we have strength as our group. And so by focusing on this, we are securing profitability and working on maintaining and expanding the market share. That is what we are doing in Japan. And that completes my explanation about forecasts for the Japan business.

This is Nick speaking, so I'll take the second question relating to margin. First of all, I would just like to sort of reiterate that our third quarter margin, although it's down on a reported basis against the same quarter in the prior year, it would be broadly flat except for the additional DAC impact in Q3. and that really demonstrates the benefit of cost mitigation actions that we continue to take to protect against the weaker trading performance on the top line. And year-to-date, the margin is down just over 4% against the nine-month period in the prior year, which was a high benchmark. The DAC impact is 1% of that year-to-date decline. And on a full year basis, our updated guidance today is that the full year margin would be 13.5%. But we've stipulated that we are going to be considering an adjusted basis in terms of how we approach dividend. And the impact on margin would be 150 basis points in terms of that 13.5% guidance. So that means that the margin would be 15%. without both the severance charges, which we're incurring to right-size our cost base in certain markets, as well as the DAC add-back. Now, the question specifically relates to Japan, but if we look at the DAC impact and the severance charges, neither of those items relate to our Japan business. So the Japan business is not really behind the reduction in margin year-on-year, but that's not to say that it's easy in terms of to maintain margin in Japan. We're still subject to the same pressures. It's still very competitive. We still need to very much invest in our business going forward. but the Japan business is not behind our margin declines. Going forward into 2024, we will really make sure that we are very responsible in terms of our cost actions that we take. We're going to be really focusing on the greater adoption of our networked talent via Dentsu Global Services, as well as focusing on improving utilization rates across our business in all four regions. Thank you.

As we are about to reach the closing time of this call, the next will be the final question. Mr. Julian Rock from Barclays, please go ahead. Please unmute the microphone and introduce yourself. Thank you.

Yes, good morning. Thank you very much for taking my question. The first one is, I know you're guiding as one Dentsu, so minus 5% organic overall for the full year, but could we get some color on Japan in Q4? Is 3% organic in line with Q2 and Q3 in the right ballpark, or can it be better? Yeah. And the second question is, can you give us more color about One Dentsu? You say client leader, empowered to connect all Dentsu capabilities with one P&L, but you actually still have different agencies with different P&L. Can you explain a bit more? Do you intend to move to one agency with one everything, finance, HR, back office, ERP, like Publicis? Or will you stay on an hybrid model with client leader, but still different agencies? Thank you.

Thank you very much, Julian, for your question. Regarding the first question, it's regarding one-tenth model. In Japan, you asked about the organic growth, minus 5%. What about the Q4 in Japan? What is the outlook? Is it 3% or so? Please elaborate further. We'd like to ask Kuretani-san to answer that question. Now, regarding the one... Then to additional question will be responded to by me later. So this is Kuretani. I would like to talk about the Japan business on a full year basis. The top-lying growth rate. As I mentioned earlier, CT&T is strong and advertising recovery is clear. That is our basic assumption. In terms of guidance, we are more cautious in terms of our outlook. Organic growth rate, positive can be achieved, but the actual level of growth rate is something we will refrain from disclosing here. But at any rate, for organic growth rate, there will be a positive number. And for the top line, last year we had the highest level ever, and it is likely that we can hit the highest level two years in a row. Now, I would like to respond to the second question regarding the one-denture model. Gillian Sun, as you have rightly mentioned, we have a client lead. The importance of the client lead will become increasingly important. myself as the team members realize this and we are putting this into action. We have to understand the challenges of the clients. By integrating our capabilities, we will provide the solutions. We want to be a long-term growth partner for our clients. And that is the reason why the role to be played by the client lead is going to be extremely important. Now, regarding the P&L, basically, it will be transitioning to the market. As you have rightly mentioned, in terms of a go-to-market brand, the agency brand do not have P&L. So we are going to be pursuing the one model. The P&L will be the front line of the team members in front of the customers. That is the transition we are going to be making.

With that, I would like to conclude today's earnings call. Thank you very much for participating today. You may now disconnect. Thank you.