Dentsu Group Inc

Welcome to the Dentsu FI 2024 Earnings Call. My name is Morishima from the Group II office, and I'll be your conference operator today. Please refer to our English website for today's presentation materials in English. Joining me today are President and Global CEO, Dentsu, Hiroshi Igarashi, Global CGO, and Global CFO, Dentsu, Yushin Soga. Soga de gozaimasu. Yoroshiku onegai tashimasu. Global COO, and Chairman and Acting CEO, Dentsu Americas, Julio Malegri.

Hi, I'm Julio Malegri.

CEO, Dentsu Japan, and Deputy Global COO, Dentsu, Takeshi Sano. There will be responding to your questions today. The agenda for today will start with business update from Hiroshi Igarashi. Yushin Soga will then present the financial update, followed by explanation of the new mid-term management plan from Hiroshi Igarashi. We will invite you to ask questions after the presentation. So, Mr. Igarashi, over to you. Good evening and thank you for joining our fiscal 2024 earnings announcement today. In fiscal 2024, organic growth rate and operating margins were mostly in line with the November guidance. In addition, all of the underlying profit items exceeded previous year's results. However, we ended up recording a significant statutory loss, mainly due to goodwill impairment loss recorded in the fourth quarter, mostly in EMEA and the Americas. By region, Japan business performed very well. However, the international business results were challenged overall, and we are taking this quite seriously. Our Japan business continues to evolve as an integrated growth partner for many clients based on the trust we have built over our 120-year history. At the same time, we are updating our wide variety of capabilities, mainly in the marketing field, including consulting and DX. In fiscal 2024, our pitch win rate improved even further and we believe that the strong momentum will continue in 2025 against the backdrop of various international events. Today, we announced our three-year mid-term management plan toward 2027. I will explain this in more detail later on in this presentation. In 2025, the first year of our plan, we are focusing on improving profitability through re-evaluating underperforming businesses and rebuilding our business foundation. In fiscal 2024, in addition to the approximately 20 billion yen share buyback that we have completed, we set the annual dividend per share at 139.5 yen, the same amount as the previous year. In our new mid-term management plan, will also aim to achieve stable returns to shareholders. Globally, we expanded our role for the jewelry brand Pandora as a partner and integrated the global media accounts into our group. In Japan, integrated proposals that combine traditional and digital advertising were highly evaluated and we won a project from Samsung Electronics Japan. Additionally, We won media projects such as Principal, a financial group in the Americas and other projects in EMEA. In the area of sustainability, we were selected as a component of the DJSI world for the second consecutive year. In terms of industry evaluations, we were named as a leader in the Forrester Wave media management services. I will now hand over to our global CFO, Yuxin Soga, to explain our financial results. Thank you, Igarashi-san. Hello, everyone. This is Yuxin. I will now explain our financial results for FI 2024. I will start with our key metrics. Organic growth rate for FI 2024 was minus 0.1% in line with the November guidance. The three-month organic growth rate in the fourth quarter was plus 2.6%, showing continuous improvement since bottoming out in the fourth quarter of the previous year. Net revenue increased 5.7% year-on-year to 1.1941 trillion yen, while underlying operating profit increased 7.8% year-on-year to 176.2 billion yen. The group's consolidated full-year operating margin improved by 30 basis points year-on-year and resulted at 14.8%, exceeding the November guidance by 80 basis points. This increase in the operating margin is mainly driven by Japan, where we saw top-line growth, its G&A expenses reduction, and a one-off effect due to changes in hedge accounting for sports content. Throughout the year, Our overall strategy has been to focus on internal investments and to continue to strengthen our integrated growth solutions as our growth driver. As a consequence, we were able to enhance our capability and created a number of global success stories. Accordingly, our underlying basic EPS increased by 4.5% from FY2023 to 355.24 yen. Dividend per share for FI 2024 is 139.5 yen, the same amount as the previous year, in line with the guidance we gave at the beginning of the fiscal year. Meanwhile, on a statutory basis, profit items resulted in significant losses, with an operating loss of 125 billion yen and a net loss of 192.2 billion yen due to the recording of a goodwill impairment loss of 210.1 billion yen in the international business in the fourth quarter. The goodwill impairment loss was mainly related to EMEA, but Americas was also a factor despite being on a recovery trend. There are two main factors behind the impairment loss on goodwill of this scale. Firstly, application of a higher discount rate than previously used based on recent market interest rates. Secondly, conservative reflection of various risks in the international business. The goodwill impairment this time has resulted in a large impairment loss being recorded for FY2024. However, this also has the aspect of reducing future uncertainties and contributing to a healthy balance sheet for the start of our new midterm management plan. The initiatives for the international business will be explained as part of the midterm management plan. Next, I would like to explain the 2024 four-year results by region. While Japan and EMEA posted growth, the Americas and APEC remained negative. More specifically, the UK and the US reported negative organic growth, while positive organic growth was achieved in countries such as Spain, Poland, Taiwan and Thailand. Japan, the largest region accounting for around 40% of the group's net revenue, continued to show steady growth in the fourth quarter, with four-year net revenue reaching a record high for the fourth consecutive year. In addition, underlying operating profit also reached a record high. In FY2024, business transformation domain continued to grow, resulting in double-digit growth following the year-to-date third quarter. digital transformation domain is also performing well. Moreover, our advertising business grew for the full year. In addition to TV's turnover returning to growth for the first time in three years, internet media in particular contributed to growth throughout the year with the group's strength in integrated proposals that combine traditional and digital advertising being adopted mainly by major clients. In FY2024, our internet media turnover was number one in Japan. Internet media exceeded expectations during the three months of the fourth quarter, with double-digit turnover growth continuing from the previous quarter, despite the high year-on-year comparator.

The Americas, which accounts for around 30% of group net revenue, remain negative for the full year. but results were generally in line with our expectations at the point of the November guidance. The organic growth rate has continued to show sequential improvement by quarter from the low of Q4 FY23, but the slow recovery in CXM is still weighing on our performance. In FY2024, CXM continued to face challenging business conditions, resulting in double-digit decline. This is due to a reduction in budgets by existing clients' new projects not being able to offset the reduction and the negative impact of sales cycle delays due to persistently high interest rates. Meanwhile, in FY2024, media stayed broadly flat ear on ear. The first half was still affected by the client losses in FY 2023, but in the second half that impact subsided and the business remained relatively stable with good results across major clients. On the other hand, creative remained negative for the full year despite the fact that synergies with TAG are beginning to produce results, including the Adobe Global Pitch win, as stated in our previous financial announcements. The three months of the fourth quarter showed a negative growth rate, mainly due to the slow recovery in CXM. Media, however, reported improvement ear-on-ear. EMEA had a positive organic growth rate for the full year. This included the one-off financial impact in the DAC cluster that occurred in the second and third quarters of FY 2023, which resulted in a lower comparator, excluding this one-off financial impact The EMEA organic decline was minus 1.5%. CXM had a slower recovery than expected throughout the year. Key markets such as the UK and Germany experienced continued decline spend reduction against the backdrop of economic uncertainty. Media in FY 2024 stayed positive. Led by Spain and Poland, it remained steady across the region. Meanwhile, creative was negative for the full year. In the three months of the fourth quarter, although creative continued to be soft, media grew at a middle single digit rate. APAC remained negative for the full year, below expectations despite implementation of intensive measures to achieve regrowth. Although the full year organic growth rate improved from the year to date third quarter, the business environment remains challenging. CXM in particular continues to face difficult conditions, especially in Australia, which is suffering a decrease in local client spends. CXM resulted in double-digit organic decline for the full year. Media in FY2024 was slightly lower than the previous year. Although the performance continued to be soft, Taiwan and Thailand are showing solid organic growth rates in the mid-single digits. creative in FY2024 stayed negative, impacted by lower client spend in China. In the three months of the fourth quarter, CXM continued to face challenges, but media was flat, ear on ear. Next, I will explain the changes in the group's underlying operating profit from the previous year. Full-year underlying operating profit increased from 153.5 billion yen in FY2023 to 176 This was primarily due to an increase in net revenue. Let me explain in detail. Net revenue increased by 16.4 billion yen, which includes a good performance in Japan, a reversal of the one-off financial impact of the DAC cluster in FY2023, as well as a net increase from TAG and other subsidiaries acquired in FY2023. The decrease in personal costs of 2.8 billion yen is mainly due to the cost management initiatives in the international markets, partially offset by internal investments in talent. Operating expenses increased 6.2 billion yen. Although cost controls have been implemented, the net increase of TAG, which started to be consolidated in July 2023, appeared as a net increase until the end of the second quarter. In addition, there were internal investments and the allowance of the trade receivables in the international markets. I would summarize our FY2024 in four key points. Firstly, the Japan business performed very well and the Americas are also on a recovery trend. But overall, the international business has had a challenging year. Secondly, the full-year impairment loss of 235.3 billion yen resulted in a net loss of 192.2 billion yen for the year. Most of the impairment is a goodwill impairment recognized in AMIA and Americas. Thirdly, we were able to start building the foundations for medium to long-term growth with our focus on internal investments in talent and technology. And fourthly, we decided to keep the dividend per share for FY24 to be 139.5 yen, the same amount as the prior year as announced at the beginning of the fiscal year. Finally, Today is the last day I will be presenting to you as Global CFO. From tomorrow, I will focus on enhancing our governance as Director, Representative, Executive Officer, Executive Vice President, and Global Chief Governance Officer. As announced in the release today, my successor will be Shigeki Endo, who has led the finance area together with me since July 2024. He will be one of the key members to implement this new medium-term plan. That's all from me. Now I will hand it back over to Igarai-san. Thank you.

Thank you, Yuxin. So let me now explain our midterm management plan 2025 to 2027. Today, I will cover the points shown on the slide. So let me start by outlining our thinking for the new midterm management plan. We failed to achieve both the business growth and profitability targets set out in the previous mid-term management plan, and we are taking this challenging situation very seriously. Reflecting on the past M&A-focused growth strategies that led to these results, we have formulated this mid-term management plan to return to strong organic growth. Considering changes in the industry environment, We have reviewed our business portfolio and we are focusing on our capital and talent in these areas while formulating a strategy to regain our competitiveness. At the same time, in 2025, we will focus on restoring profitability by re-examining underperforming businesses and rebuilding our business foundation. Our progress towards One Dentsu will not stop as we return our international business to growth trajectory and strengthen shareholder value. What lies ahead in this mid-term management plan, which covers the period up to fiscal 2027, is the realization of our group's vision to be at the forefront of people-centered transformations that shape society. This vision remains unchanged in the new mid-term management plan. However, as Yuxin mentioned earlier, our current business performance is in a challenging situation and we believe that we must return to a growth trajectory over the next three years. Therefore, in fiscal 2025, we will take initiatives to restore profitability by reviewing underperforming businesses and rebuilding our business foundation. And from fiscal 2026 onward, we will focus on our activities for growth. As a result, we aim to have no markets operating at a loss by fiscal 2026 and to make ROIC of international business exceed WAC, contributing to the improvement of shareholder value by fiscal 2026 and in all four regions by fiscal 2027 as well. Through these initiatives, we are aiming for organic growth rate of 4%, operating margin of 16% to 17%, operating cash flow of 140 billion yen, and ROE in the mid-teens range as our key financial targets for fiscal 2027, the final year of the midterm management plan. Now I'd like to explain our direction and challenges behind the formulation of this mid-term management plan. As I mentioned earlier, we failed to achieve the organic growth and operating margin targets of the previous mid-term management plan. The primary reason is our underperforming international business. Underlying this issue are the adverse effects of our previous international business growth model that excessively emphasised M&A. Specifically, lack of integration within our organization following M&A led to increased complexity and silos, and we struggled to generate sufficient synergies, resulting in a high cost structure. We also recognized that one of our challenges was not having made enough progress in realigning our business portfolio. As I have explained in previous financial results announcements, we have already begun taking countermeasures to address these issues. However, we will accelerate these efforts under the new mid-term management plan. Around the world, huge players are emerging both inside and outside our industry, and their movements are becoming even more active. Technology and consulting companies are investing vast amounts of money in areas such as AI, and this is also affecting adjacent industries. leading to major changes in the competitive and business environment. Under these circumstances, the most urgent task for our group is to restore profitability and competitiveness of our underperforming international business with the aim of returning to a growth trajectory in 2027. Based on lessons learned from the past, We are taking countermeasures to address this issue in an environment of intensifying competition, such as by thoroughly eliminating inefficiencies, rebuilding our business foundation, closely re-examining underperforming businesses and promoting a business strategy based on a model of this building trust with clients that Dentsu has cultivated in Japan over the years. First, we are focusing on two initiatives to improve profitability, evaluating underperforming businesses and rebuilding our business foundation. Regarding the re-evaluation of underperforming businesses, we are implementing thorough and swift measures, having considered all options for businesses that are not enhancing shareholder value. In terms of rebuilding the business foundation, we will record one-off expenses in 2025 and promote simplification of the organization as well as standardization and advancement of operations. We expect to see the effects of these changes in the form of reducing operating costs from 2026 onwards. With regards to re-evaluating underperforming businesses, we will review them from a market and entity perspective and implement respective measures. We have set a goal of no markets operating at a loss and international business contributing to enhance shareholder value by fiscal 2026. And in fiscal 2027, the final year of the mid-term management plan, we aim to contribute to enhancing shareholder value in all four regions. Next, by rebuilding our business foundation, we aim to achieve operating cost reduction of up to 50 billion yen as at 2027. Specifically, we aim to simplify operations by integrating the Tokyo and London headquarter functions and by redefining the role of regional headquarters in addition to implementing cost control measures in the markets. By promoting these efforts in conjunction with the streamlining of operations through AI and systems, we will systematically carry out sustainable cost reductions. Next, I will explain our business strategy for restoring our competitiveness. Our groups offering to clients will continue to be the integrated growth solutions. which integrate our unique and wide variety of capabilities to achieve sustainable growth for our clients. On that basis, our new mid-term management plan has adopted a policy, a network that wins globally by growing locally. Through this policy, we aim to become our clients' growth partner in each of the markets and grow globally together with our clients. This policy is supported by our unique strengths and associated know-how. Firstly, how we build long-term relationships with our clients in each market based on deep understanding of client businesses by leveraging our experience in Japan. Secondly, our continuous supply of innovation that address market-specific needs. Lastly, our talent. who work side by side with our clients and enable us to have a significant impact on society.

To realize this strategy, we are investing capital and talent in priority areas and markets that will enhance our competitiveness. First, our market strategy will focus on Japan and the United States, which are large markets with a wide variety of business assets. At the same time, we will selectively strengthen markets where we already have a strong position. Regarding our client strategy, we will strengthen business expansion with existing clients and acquire new clients based on a sales strategy that further deepens relationships with large and medium-sized clients in each market. To remedy the fact that our capabilities have not been updated, we will focus on improving the added value of our core media business in the international business with the aim of recovering business performance. Meanwhile, in Japan, as an advanced market for integrated growth solutions, we will strengthen our capabilities in areas such as consulting, technology, and sports and entertainment, which will lead to further differentiation. To strengthen the capabilities of our international business, will focus on the media business and areas that lead to added value which is the starting point for IGS integrated growth solutions in particular we will be focusing on strengthening partnerships with media and platform companies in areas of modern media that are projected to experience significant growth in the future such as pragmatic and retail media in addition By proactively strengthening solutions and with collaboration in the creative and CXM domains, we will improve the value of media services and at the same time enhance our ability to provide solutions to client issues. In particular, we have a number of solutions that strengthen media capabilities in the U.S. Adobe Gen Studio Dentsu Plus is one such solution that we recently released. Combining our capability of production by tag with Adobe's tools and AI, it enables us to quickly create and verify high-quality advertising materials, further increase our competitiveness of media. These initiatives will be led by Giulio Malegori, chairman and acting CEO Dentsu America's Beth Ann Kaminko, who will take up the post of the CEO of Dentsu North America. Beth Ann has extensive client experience in our industry, and I am confident that she will establish trusted relationships with our clients in the U.S. In our Japan business, which continued to achieve growth and high profits in fiscal year 2024, We will further deepen our integrated growth solutions. This will be achieved by continuous improvement of marketing services that utilizes data, strengthening initiatives that lead to differentiation, further growth in the consulting business, strengthening synergies with marketing in the technology business, and expanding growth in the sports and entertainment business. In addition, we will expand our global business starting from Japan by strengthening support through our group's global network for the overseas expansion and business of our Japanese clients. We will also continue to consider alliances and partnerships that strengthen these capabilities while we accelerate our integrated growth solutions and firmly establish our position as a growth partner for our clients. Regarding our financial policy, through initiatives to recover profitability and competitiveness as well as conducting disciplined financial activities, we will prioritize restoring a healthy and efficient balance sheet over the next three years. As part of these efforts, we will continue to proactively engage in selling non-operating assets such as strategic shareholdings. Furthermore, We will carefully conduct all investment activities under investment principles that have been updated based on past reflections in cooperation with the Finance Committee established last fiscal year. Our approach to capital allocation is to prioritize one-off costs related to rebuilding the business foundation and internal investments for growth. In terms of shareholder returns, we will maintain the same policy of 35% dividend payout ratio of underlying basic EPS as in the previous midterm management plan and keep dividends at the previous year's level in fiscal 2025 when investment will take precedence, thus aiming to maintain stable dividends throughout the period of the midterm management plan. M&A, which was suppressed in fiscal year 2024, will be executed selectively in accordance with the progress and outlook of business performance recovery consistent with our business strategy. We will make decisions and manage with tighter discipline than before. To improve shareholder value and capital efficiency through these initiatives, we have newly set ROE as one of the key financial targets of this mid-term management plan. We will restore ROE, which had been on a downward trend during the previous mid-term management plan period, and aim to achieve a target in the mid-teens range by fiscal year 2027. In parallel with promoting our business, we will continue our commitment to a sustainable society integrity and good governance. Our sustainability initiatives which we communicate through our integrated reports and other means have received high praise from external evaluators in recent years. We are making steady progress towards the goals set in our 2030 sustainability strategy. We will continue to invest in acquiring and developing talent to support the efforts and will continue to promote human capital management. Finally, I would like to introduce initiatives in the sports and entertainment field that are poised to grow from 2027 onward and which will be carried out in parallel with the initiatives of the new midterm management plan. In Japan, we have been involved in a dual-pronged business that involves both our own rights investment and our client-oriented solutions business. By deploying this unique business model, In major markets, we aim to strengthen synergies with integrated growth solutions in our international business. Furthermore, through initiatives such as building a business portfolio that spans across the IP value chain, we will focus on contributing to the global growth of IP and establish new businesses to strengthen our uniqueness. This is the guidance for fiscal year 2025. The organic growth rate is expected to be around 1%. The Japan business is expected to grow around 3%, while the international business is expected to return to positive growth. We aim to achieve the same level of net revenue as in fiscal year 2024. The operating margin is expected to be around 12%. The decline from fiscal year 2024 is primarily due to upfront spending of internal investments to restore our competitiveness. On a statutory basis, we aim to turn positive. However, we are expecting that operating profit will remain at 66 billion yen and net profit at 10 billion yen due to the planned recording of one-off expenses to rebuild our business foundation. In 2025, although we aim to return to growth, we expect this year to be a challenging year from a profit perspective as we will implement the initiatives to achieve the goals of the new mid-term management plan. Regarding shareholder returns in fiscal year 2025, we will maintain a stable dividend. This year will be a transitional year for the recovery of profitability. We expect the annual dividend per share to be 139.5 yen, the same as in fiscal year 2024. To summarize, we have formulated a mid-term management plan and will return to a competitive business with organic growth of 4% and an operating margin of 16% to 17% by 2027. In 2025, we are focusing on recovering profitability through rebuilding the business foundation and re-evaluating underperforming businesses. We will maintain the shareholder return policy of dividend payout ratio of 35%. Importance will be placed on stable dividend in fiscal year 2025 despite the temporary profit deterioration and plan to pay an annual dividend of 139.5 yen which is the same as fiscal year 2024. We have set a target of achieving ROE in the mid-teens range by 2027 and will strive to manage our business to enhance corporate value and improve shareholder value. Thank you. I will now hand this back to the moderator as we welcome your questions.

We will now begin the Q&A session. The first question is, is from Nagao-san from the BOA Securities. Please unmute yourself. Thank you for selecting me. This is Nagao from BOA Securities. I would like to ask two questions. Quite a significant loss or the impairment loss that you've booked on this occasion. And as we enter into a new meter management plan, you wanted to essentially clean away unprofitable assets? Is that what you have done? That's the first question that I wanted to ask. And in regards to my second question, when we look at the performance for the next three years, and as Mr. Igarashi has explained, that this year is likely to be a year of a slow start. But when we look at 2026 and 2027, How are you assessing those two years? So maybe the trajectory of the profit that you intend to achieve. So these are the two questions that I want to ask. Thank you very much, Anago-san, for your questions. Thank you for your two questions. Large impairment loss this fiscal year. So as we start the new midterm management plan, have we been able to essentially clean away all of the profitable assets? I'll respond to that question, and I'll ask Soga-san to make any additional comment. And the second question was in regards to the new three-year mid-term management plan. The 2025 may be a slow start and a more tougher start, but what is the expectations for 2026 and 2027, particularly in regards to assumptions on profits? And I will also respond to that question as well. Now, the first question, the large impairment charge that we've recognized on this occasion, I do take this very seriously, particularly in regards to international business, where we saw underperformance. And that certainly has been the cause. However, as Mr. Soga Yuching has explained before, in registering this impairment charge, we did actually assume quite a conservative stance in coming up with the projections for the future in recognizing this impairment charge on this occasion. It is a large amount that we have recognized, and this has actually included quite a large portion of our risk. But as I have explained, we are certainly doing a re-examination of underperforming business, and we will certainly address this with a sense of speed. And so throughout 2025, we... intend to certainly address those situations and I do like to state this quite strongly to you all. This is Yushin Soga speaking. Thank you, Nagao-san, for your question. Your question was that we took a large impairment charge on this occasion. Have we been able to essentially clean away our profitable business? And, well, to this question, it's probably don't need mentioning to you, but the background to recording the impairment loss over goodwill. Now, as Igarasan has explained, for the mid-term management plan, we use the rational, the business plan that the management thinks is But the assessment of the goodwill, we need to achieve an agreement with some external auditing firm. And so the rational business plan that the management is thinking, sometimes on this occasion we have to use more conservative stance than what the management has expected us And so that was behind the impairment charge on this occasion. So it was a conservative business plan that did actually reflect the risk on a conservative basis. However, in the MTMP, the mid-term management plan, the business plan included, is something that the management or the company is established based on the rational assumptions And so the management will execute this steadily so that we are able to regain back this impairment loss as quickly as possible. But when you ask as to whether we have been able to clean away, well, this is an accounting practice. And so to completely clean away the underprivileged businesses is the most important challenge for us. And rebuilding of the business foundation is the most important thing that we are going to address as part of this meeting management plan, as Ikaro-san explained before. Now for us to do this, we need to lower the cost base and we also need to, I suppose, discontinue unprofitable business and by doing this we are going to rebuild the business foundation. So in regards to unprofitable business, have we been able to completely clean away? Well that is what we are going to address as the most important challenge for us in our initiative going forward. Now your second question was that for our three year performance going forward, What is the profit expectations for FY26 and FY27? Well, for FY27, we are aiming for the levels that you can see. These are the goals that we've set. As I explained in my mid-term management plan presentation before, what we will do is first do a thorough review of the unprofitable market, unprofitable business. By doing this, we will stop the loss bleeding. And so that should enable us to secure a certain level of profit base as a cause, as a consequence. In the end, by 2027, but during 2026, we are going to make these loss-making markets to zero and transform international business into an operation that can contribute to enhancing shareholder value. That is what we intend to do in 2026. And so in that regard, we do expect for the progress in regards to the profit base. That is what we are going to aim for. That is all. Thank you. Thank you.

Mr. Nagao, thank you very much. Next, the question is from Ms. Fiona Orford-Williams from the Edison Group. Please go ahead. Thank you.

Thank you very much. Fiona Orford-Williams from Edison. I mean, obviously there's a lot to take on board this morning, but in terms of the CXM, and that does seem to be the main issue in the non-Japanese markets, And I know I hear what you've said, but is it still, do you think, the right offering to be putting out in those markets? Or does it actually need a more fundamental rethink? That's the first question. The second one is the concentration on shifting in order to grow markets. globally by growing locally, so concentrating on growing the local clients. Does that mean you're actually withdrawing from the large global pitch arena and leaving that to the behemoths of the industry? Thank you.

Fiona-san, thank you very much for your question. Regarding your first question, it's related to CXM, meaning that in the markets other than the Japanese market, It has challenges, but towards each market, is the offering appropriate or not? And whether we need to fundamentally rethink about it, I believe was your first question. And regarding this question, I would like to answer. But after my answer, I would ask Julio, the COO, to support the answer. And the second question, are we going to concentrate on the logo of business? I believe that you have understood my explanation that way, and whether that's going to lead us to withdraw from the global pitches, I, myself, Igarashi, would like to respond. First, related to the CXM. As I pointed out, the FY2024 performance from that result at each market globally, it shows that CXM is struggling in each market. As we have pointed out, the assets that we have, whether the offering is appropriate, the market itself, as explained before, it's not just for us, but for our peers and competitors. They're all struggling because of the market condition because compared to the previous years, the sales cycle itself is getting longer. And as Mr. Soga said, the interest rate has hiked, and so the advertising spent has also decreased. And apart from these external factors and environment, for us, regarding CXM, which domain can respond to the client's needs? And which domains should we focus on? And how can we enhance our solution capabilities together with the integrated growth solutions? One good case is that we did win the global pitch of Adobe. And together with their product around the creative and contents domain, we are going to strengthen our supply chain. This is extremely close domain and close collaboration with the CXM domain, and we are starting to see solid results from that. So we would like to determine these fields, meaning that fields that can win against CXM, and also we would like to focus in areas where we can win more. So, Julio, if you have any additional comments, please go ahead.

Thank you, Ulysses, and thank you, Fiona, for the question. To beat on Ulysses' comment, yes, there's been definitely pressure from the market condition in both the U.S. and the other international market, you know, but it's also on our side internally. So how we are reacting and how we are reacting, you know, we almost complete the growth transformation mainly on two directions. The one direction is on the offering. Therefore, we will focus on the highest growing segment and specifically double down on CX and commerce, especially on the content supply chain. You know, I guess I just mentioned about GenStudio Dentsu Plus as an example, experience design and commerce itself. To that regard, also the new chief exec that we identified for the North American market comes from a broad experience on that angle. The second area is, of course, on data analytics. As we could expect, you know, data analytics are important in itself. the data platform, but also the analytics to feed, you know, the connected media offer. And the third area where we are accelerating our offer is on our core. There was the CRM and loyalty. That would be promotion or loyalty program in itself. So that's as far as the offering and the pro-development is concerned. The other move, referring, for instance, to the U.S. market, is that we really nearly completed the transformation of our leadership team. We had proven sought-after market leading talent, and I would say change agents. You know, we have a new CTO. We have a new leader for CRM. We doubled down on data platform analytics with our leader, and last but not least, an EOCO for the Merkle operation. So we believe that the combination of renewing the offering and, you know, transforming the leadership would permit us to accelerate the return to grow in spite of the market condition. Thank you.

Thank you very much. And regarding the second question that we will concentrate on local, and are we going to withdraw from the global pitches? No, not at all. Even currently, we have about 40 accelerator clients globally, and with them, in a thorough manner, we are sharing the growth solutions and working together with them as their partner globally. we are continuing to increase our footprint. However, in this midterm management plan, within the integrated growth solution, the focus will be on IGS. And when we do that, more than a one-stop service globally, but it will be rather something that will be better matched to each client's needs. or the strategy for each client. We believe that this IGS will become that way, meaning that we will grasp the situation of each client, and each market will be the partner of that client. And each partner or client being able to globally glow is what we're aiming for. So our IGS strategy, meaning that responding in detail to the client needs, we have stated the strategy to achieve that in this mid-term management plan. So, walking together with our global client, we will strengthen that part. So, it's not that we will be decreasing that or withdrawing from that.

Thank you, Fiona, for your question. The next question is from Mr. Maeda of SMBC Nikko Securities. Please unmute yourself. Thank you. My name is Maeda from SMBC Nikko Securities. I have two questions and somewhat of a detailed question as well. But first question is in regards to the expected forecast for the new fiscal year, underlying operating profit and the net revenue, the difference between the two. on a year-on-year basis, 43.6 billion yen of an increase. And net revenue is going to increase by 1%, but the profit 4.2% increase. I think that's the plan. So what's the organic growth and what is the cost reduction gains and more strategic aspect that is going to increase from a long-term perspective? So 43.6 billion yen. SG&A... is expected to increase more than the net revenue so if you could give the breakdown and between operating profit and underlying operating profit the gap between the two is 80 billion yen on this occasion and so one time the impairment or the structural reform cost if we don't have that the gap should normally be between 30 to 40 billion yen but why are you expecting 80 billion yen? Are you still trying to still restructure some of that unprofitable business which is expected to book some expenses? I'm sure you have some of those, and if you could explain some details numerically, that would be my first question. And the second question, how to think about the numbers for the final year of the mid-term management plan? ROE 10%, or around 10% range, operating cash flow of 140 billion yen. and maybe intentional, but underlying operating profit. That would be around 180 billion yen, I would assume. But if you have some ballpark numbers there, if you could share that with me. And the thinking behind coming up with these numbers, and based on the rational estimation, these were the numbers you were able to announce. Or when you think about improving shareholder value and when you think based on cost of capital, then the mid-10% range or mid-teens really must be achieved. And so is it more the market perspective that you came up with the numbers? So for the final year of the mid-term management plan, What is the message that you wanted to communicate to the market based on the numbers you have set to achieve for the final year of the business management plan? So these are the two questions. Thank you very much, Mr. Maeda, for your question. So for the new year, underlying operating profit, 43.6 billion yen. And you wanted the breakdown of this inclusive of SG&A, and it's 43.6 billion yen. how this was calculated. He wanted to understand the breakdown details. And also, between operating profit and the underlying operating profit, the gap between the two is 80 billion yen. And what does this comprise? I will ask Soga-san to respond to that question. And for the second question... So I'd like to talk about the basis upon which coming up with the numbers of final year of the mid-term management plan. What are some of the perspectives that I have assumed? So I will try to explain that first. Then, in coming up with underlying operating profit, you said 180 billion yen is the probable amount, but is that amount appropriate or not? And I will ask Souga-san to respond to that question. But I will respond to the second question first, and I will ask Souga-san to supplement. So this is Souga speaking. Thank you, Mayada-san, for your question. I was trying to understand your question. I may not have been able to understand your question fully, but if my response is insufficient, please ask again. First of all, in coming up with the budget for this fiscal year, in the P&L this year, we do have 50 billion yen of the structural reform, the cost which is part of the non-underlined item. But the underlying items from last year, we have been making internal investment. And as Mr. Igarashi has explained, we will work on integration that was not fully sufficient. And so it does include things like IT investment or to create a group synergy, there are investment required and also investment for other people as well. These are investment for our growth in the future. That's about 20 billion yen that we are assuming. And on a year-on-year basis, as explained in the presentation before, but Japan in the fourth quarter achieved a very strong result and made significant profit contribution. As a consequence for the group overall, the guidance was 14%, but we ended up at 14.8% for the group. I won't say this was just one time factor, but as to whether we can expect this again in 2025, well, the frank view is that it may not be as easy. And the same applies to part of the U.S. business as well, So when we announced our result at the third quarter, well, in comparison to the level that we assumed at the announcement of the third quarter, we have been able to control costs, particularly the personnel costs, and that has enabled the profit to be increased. And so in addition to $20 billion of internal investment, Japan and U.S., the fourth quarter positive impact. It may be difficult to assume that in FY 2025, so we have assumed some conservative outlook for this year in that regard. So these are probably the major items. Now, non-underlying statutory expenses, so 50 billion yen of cost. So in addition to that cost, around 20 billion yen is the depreciation of tangible fixed assets or the depreciation of the office lease, and that's probably about 20 billion yen in total. So when you add all those, that's 70 billion yen. You said 80 billion yen, but of that you can actually account for 70 billion. Now, if my response was insufficient, please ask a question again. Thank you. Thank you. And please allow me to respond to your second question, and if our responses are insufficient, please ask again. Now, for your second question, in 2027, in addition to the target numbers for that year, well, what we need to aim for as part of the new midterm management plan in terms of the corporate value, we need to look at the shareholder value and to think about what we can realise. And in the process of getting there, what are we to make improvement, what do I need to enhance? And that is what we have looked at thoroughly from the financial perspective, and not only from the management perspective, but together with outside directors, we've been thinking about this, and we've been working on this as part of the Finance Committee. And what are the KPIs that we should adopt as we run our business? And so this was a theme that was discussed in quite detail. And as part of that, in the end, we came up with our ROE in the mid-teens range. And that is in alignment with the corporate value that we should aim for. And it should be a goal that should align with the shareholder value in that regard. And for us to realize that, what are the improvements that we need to work on right now? And you talk about dealers making markets and talked about reexamining non-profitable business. We need to go through those steps. And by doing so, what type of growth and profit can we secure? And we wanted to reorganize the process and work on that so that we're able to reach the mid-teens range for ROE. And this is to respond to the expectations of the market participants. It's a goal for management. And so that was the basis upon which we have identified this as being the number for the final year of our mental management plan. Now, on that basis, Myra-san, in assuming an underlying operating profit, you've kind of asked us whether this is 180 billion yen or so. On that part, I will ask Soga-san to respond. This is Yushin Soga speaking. In 2025, so we are going to execute large-structure reform to lower the cost base and achieving growth on top of that. We will achieve the mid-term, the KPI that Igarai-san has explained earlier. 180 billion yen, I do feel that that is a rational level in 2027. In all of the regions, we want to exceed the competitors in terms of growth rate. That is what we set out to achieve. As to whether it's going to be $180 billion or not, we would like to refrain from providing a direct response to that. But the target in 2024 for underlying operating profit was $100 billion. and the 80 billion yen. So we need to certainly aim for a level that was higher than that. Thank you. Maybe my question was not too clear in my first question. And from net revenue to underlying operating profit, if you actually subtract that, you end up with the expenses. And so that is going to increase by 43.6 billion next year. and the 20 billion yen for fee. So it's going to be expensed, this 20 billion yen, and also the personnel cost reduction in U.S., the rebound from that should see some increasing cost. And there is also organic growth. And all in all, the cost against underlying operating property will increase by 43.6 billion yen or so. Is that the right understanding? Thank you very much, Myra-san. In terms of internal investment, it's about 20 billion yen. It's not just related to IT. And as we have been explaining from last year, it could be on people talent. It could be on data. So investment towards those items are also included. So it's not always CapEx. and it's not 100% capex either. But on a budget, we have booked 20 billion yen of cost on the P&L, and we will allocate this to the various regions, and we'll use that when necessary. So that's the thinking adopted. And you talked about the U.S., and this is not too large. It's about 2 billion yen. And rebound in Japan is larger vis-à-vis the rebound in U.S. in the fourth quarter. It's kind of temporary, or it's a $7 billion that we were able to book, fortunately. But when we look at the fourth quarter last year, the operating margin increase was about $10 billion in terms of personal expenses. And so as to whether we can expect this again this year, I think it's a little too early to expect this again this fiscal year, so we subtracted that amount. As to whether the cost is going to increase or not, I don't know, but as to whether we are able to retain the lower level, there are some uncertainties, so we actually calculated that back. Thank you very much. That was very clear.

Mr. Maeda, thank you very much for your question. I'd like to take the next question from Nomura Securities. Mr. Harahata, please. This is from Nomura Securities. This will be a follow-up question to the previously asked questions. So I have two questions. The first question is related to page seven regarding the impairment that you recognized at this time. This was opinion by the outside audit firm. And the reason, you said, the market condition changes and the risks overseas. Specifically speaking, what are they? And the growth rate of the net revenue and the operating margin. Can you actually explain about it for EMEA? And the second question is on page 38. $50 billion with the rebuilding the business foundation and for internal investment, $45 billion. Can you elaborate on that? And what is my concern is $35 billion to $50 billion cost reduction on page 35. With this, is there any I'm concerned that the SG&A will increase by this, so I just want to confirm that. Mr. Harahata, thank you very much. Your first question is related to page 7, related to impairment loss. The outside auditing firm, you said that it was agreed with them, and do you want to know what were the risks? You wanted to confirm the assumed risks? And also the level of net revenue, EMEA and Americas, what is assumed in what way and why did that lead to an impairment loss? Soga will be explaining that. And the second question, $50 billion for internal investment. And as on page 38, the $45 billion is clearly stated. And on page 30, this from 35 to 50 billion yen positive effect or a positive outcome? Will there be any other additional expenses that may incur? Soga will explain that as well. Mr. Harada, thank you very much for your question. First of all, I just want to explain for you to not misunderstand. Our outside auditor is KPMG and us, and under constructive discussion with them, we do reach the financial results and we process the financial items. This time, we created the new midterm management plan, and within the process, we had discussions with the auditing firm. And within that discussion, in the overall industry, for example, the IT rapid rise, in the market and recently what was announced Omnicom IPG merger and due to that there is the economic of scale is shifting over to economy of scale if we include all that the industry environment is very difficult or tough and compared to that the understood the KPMG understood the content very well and regarding the content KPMG is not pleased to say anything but looking at the past track record and looking at the current industry environment reflecting this to the goodwill valuation whether we should do that or not we had various discussions with them and therefore as mentioned before in the midterm management plan we have the reasonable business plan that the management thinks is set But as we have explained, the potential risk, we have conservatively reflected that in the business plan. And based on that, we have recognized impairment loss. And the valuation of the impairment is based on the midterm management plan. So from 2025 to 2029, how are we going to look at this business? Based on that, we evaluated the impairment. And I wanted to explain... say this as your reference. And the second question was, what was that? Well, first of all, regarding the $50 billion of the internal investment and the second question, excuse me, the first question was EMEA's and America's net revenue and the operating site. Excuse me for that. This is Foga speaking once again. And the budget for 2025 for the international business is almost flat this term. The utmost challenge that we have to overcome is to build the business foundation that should have been there from the beginning. And so we have all the efforts put in that. And there are impacts to the business due to that. So America is at the center, basically. we want the international business to land as flat. If your question is regarding the three regions excluding Japan for this fiscal year, it will almost be flat. And regarding the second question, Igarashi will like to answer. Regarding the internal investment, in 2025, 50 billion is what we are expecting. And as I have been explaining, we are going to simplify the organization. The global headquarter function, we are going to thoroughly re-examine that. And in line with that function, there are things that will be simplified. And the region headquarters will be re-examined from the perspective of simplification. And also, simplifying the organization is from the perspective of cost reduction. and within that personnel expenses will also be re-examined and so the cost control will be done there utilizing AI and various systems also will be organized so that the business process can be standardized within the simplifying the organization and also regarding the $45 billion of internal investment. As Soge explained, this is something we've been continuing from last year. The assets that we have acquired up to this time, how can we connect them in an effective way and make it more of an efficient one? And to do so, we are expecting $45 billion and in total, And as you see on page 30, the $35 to $50 billion, the $50 billion cost will be spent to standardize or sophisticate the business process. That will lead to the simplification of the organization, which will lead to a cost reduction. And regarding this, we will be recognizing the expenses this fiscal year. so that this cost reduction effective can be continuously enjoyed. And to do so, are there additional investments necessary? We are not thinking that at this point. Thank you very much for your thorough explanation.

Thank you very much, Mr. Harahata, for your question. Next question is from Abe from Daiwa Securities. Please unmute yourself. And this is Abe from Data Securities. Thank you for the opportunity. I have two questions. First question is what you have identified as a challenge, insufficient integration. And I do believe that you've been working on integration quite proactively, but was there a bottleneck or something like that which has prevented that integration to proceed well? So that's the first question. And second is to improve the additional value in the media field, specifically what can we assume in this area? And also, what are the lacking capabilities vis-à-vis competitors right now? If you could also give that information as part of your response. Thank you, Abesan, for your question. Your first question was the insufficient integration or non-thorough integration. Despite us working on the integration thus far, the fact that it wasn't sufficient, was there any bottleneck? That was your first question. I will respond to that. And we are going to focus on the media domain. And in focusing on this area, what are the capabilities of that we lack right now, if there is any. Together with the focus area, we would like to give some information. For that part, I would like to ask Julia to respond. To answer your first question, insufficient or non-thorough integration, as you have indicated, we have been working on one density based on one operation model. And we have been pursuing a new integrated model thus far. However, the previous model that we have used for operation on a global basis, now that was a matrix between the service lines and the regions. It was a matrix approach. Now in that for service line, we were looking at the individual and the P&L. And so this has caused quite a strong silo effect. And of course, we are heading towards the operating model, but to fully remove the silos and to reorganize the capabilities in reflection of this situation, and to reshuffle our portfolio to respond to the issues. This has taken more time than we wanted. What we need to work on has been made clear and so in that regard we can accelerate our initiative to address that going forward. In regards to your second question, could I ask Julia to respond please in regards to how we are going to strengthen our media domain?

Thank you. Thank you for the question. This is Giulio Maligari speaking on the media one. You know, I think to ask the question where we're focusing on an eventual lack of capability or insufficient capability, you know, as your son said in the overall introduction of the strategy, you know, we're going to put the media business first. at the center of the delivery of IGS. And in doing that, there will be a specific focus area on media, you know, strengthening on modern media. This means that will include programmatic and retail media. Our retail media offer is quite advanced indeed. When we look at overall on the media management service, You know, recently Forrester named Dentsu Media as a leader by saying that Dentsu places media and market innovation at the center of its client audience and brand activation. We will accelerate that with the use of technology and AI. You know, a few months ago, we launched the Mercury Data A-powered audience builder and that has really helped to offer integrated advanced capability to be able to turn insight on consumer into action, into activation. we are all aware that, you know, why media is at the center because there is a convergence on that, you know, it's not just media activation, it's data, it's CRM, ultimately it's commerce. So we are putting our focus on that and investing on technology and artificial intelligence to develop that. So I believe, I don't want to sound too confident but I believe that we have all the capability that are needed to succeed and compete in media and last but not least a strong coverage across all if not most of the geographies around the world. Thank you. Thank you very much.

Did you hear the answer? Yes, I did hear the answer. Thank you very much. We are getting close to the scheduled ending time, so the next question will be the last question. BLFA Securities, Mr. Nagao, thank you very much for asking your question again. Thank you very much. Regarding the capital allocation, I wanted to ask you, you are going to prioritize internal investment. Therefore, the shareholder return and payout ratio, you have maintained it. But moving forward, as the profit level increase and as your competitiveness recovers, share buyback or further increase of the payout ratio, these type of topics basically will come about from 2027 and onwards, so internal investment, or if necessary, I believe there will be M&A and shareholder returns, the balance amongst these three. In the next three years, more than shareholder return, you're going to focus more on internal investment. I just wanted to hear your thoughts regarding the capital allocation and shareholder return. Mr. Nagao, thank you very much for your question. And first, I would like to provide the answer. And Mr. Soga, if you have a follow-up comment, please go ahead. Regarding the capital allocation, M&A, internal investment, and shareholder return, how do we think about these three, I believe was your question. Well, this term, we have to conduct very transformations And based on the thinking of, though it is a special year, we want to maintain the shareholder return and maintain the dividend as 139.5 yen. Of course, as the business performance recovers, our payout ratio is at 35%, and we have been maintaining that policy. Therefore, money amount-wise... I would like to bring it to a level that we will be able to return to our shareholders. And furthermore, currently, regarding the share buyback, we cannot place priority on it. We will have to say that. But having said that, of course, once the business performance recovers and once we have a surplus in terms of the capitals that we can allocate, of course, we will consider that. And regarding M&A, as I explained in the midterm management plan explanation, we like to focus on a solid growth, not dependent on M&A. We're at that timing is how we think. Having said that, regarding the new domains or fields, within various considerations, there may be situations where M&A is unnecessary. And when that time comes, within our M&A committee, we have a solid discipline. And we will be sharing what we want to do with the board and how the M&A should be done and also maintaining the responsible future discipline are topics that have been discussed within the board as well. Therefore, even though we do decide to M&A, we would like to place importance on the discipline of that. We would like to focus on the growth and also provide steady shareholder returns. This is Silvia speaking. Thank you very much for your question. Up to now, or so far, I have been talking about capital allocation. Simply put, We will make a growth investment for continuous growth and, in parallel, provide a stable dividend to our shareholders. And next, in a flexible manner, conduct additional returns. In a short-term perspective and looking at the business situation right in front of us, the utmost challenge is that, of course, it's our performance of this term. We have the... net revenue of $1.2 trillion, but we're not able to increase the profit. We need to fundamentally rebuild the business foundation. And to do that, we're going to spend $50 billion for the structural reform. And that's 2025's capital allocation. And if we're thoroughly able to do that, 2026 onwards, we believe that the situation will improve. Having said that, you asked the question about things that are actually going to happen from 2027 onwards. Well, first of all, in 2025, we will be focusing on the structural reforms, and once we complete that, then the $1.2 trillion of net revenue We will create a lean organization that will support that 1.2 trillion yen appropriately. And in addition to that, as what was explained in Igarashi-san's explanations in the midterm management plan, we will invest in growth, data, talent, and also in order to conduct appropriate business transformation, M&A is also necessary. So structural reform and growth, when these both wheels will turn, then we will like to think about the additional shareholder returns. Whether that is going to be from 2027 onwards or not, we would like to create a situation where we will be able to do this as soon as possible. Thank you very much for your thorough explanation.

Thank you very much Mr. Nagao and others for asking questions. With that, I would like to conclude today's earnings call. Thank you very much for participating today.