Thank you very much for participating in the Dentsu Group Inc. Online 2020 Full Year Earnings Call. I am Chuya Aoki from Dentsu Group’s IR office. Joining me today are, from Tokyo, Toshihiro Yamamoto, CEO, Dentsu Group...

[Foreign Language]

Hiroshi Igarashi, CEO, Dentsu Japan Network.

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Yushin Soga, CFO, Dentsu Group...

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From U.S., Wendy Clark, CEO, Dentsu International.

Hello. Good morning, everyone.

From U.K., Nick Priday, CFO, Dentsu International.

Good morning, everybody.

These are the 5 speakers today. Now I’ll explain how we will proceed today. First, we will hear the fiscal year 2020 review from Mr. Toshi Yamamoto. After his presentation, Yushin Soga will continue to explain the fiscal year 2020 full year financial update. And then Toshi will explain mid-term management plan, sustainable growth through transformation. And after that with that, we will invite you to ask questions. The call is scheduled to end at 2100 Japan Standard Time, but may be extended by 15 minutes if needed. Mr. Yamamoto, please go ahead.

Welcome. This is Yamamoto Toshihiro, President and CEO of Dentsu Group. Thank you for participating in our fiscal Year 2020 earnings call. First, I would like to give my comments on the fiscal year 2020 operating profit and net profit. The underlying operating profit and the underlying net profit were positive, respectively, JPY 123.9 billion and JPY 70 billion. However, due to onetime charges related to the accelerated transformation program and the goodwill impairment of our international business, the statutory operating profit and net profit turned negative, and we take these results extremely seriously. 2020 was a challenging year for society, for our clients, our business and, of course, our people. Throughout this year, our people across the organization have shown dedication and resilience. I would like to express my thanks for their dedication to our business during a time of tremendous change. Also the year brought many challenges, we also saw some success in client relations, namely with our new business performance, which we saw increased momentum in the final quarter of the year. I am also pleased to report we have made significant progress against the comprehensive review we announced in August last year and the details will be explained later. Looking at our highlights, new client logos added this year include American Express, Generali and Kraft Heinz, but we have also seen the expansion of existing client relationships. Heineken is a great example. We went from 0% of our global media spend in 2017 to 97% in 2020. In addition, the joint venture we announced in 2019 and formed with Toyota was launched in January as planned. The project has started well with the aim of enhancing marketing and data management throughout the supply chain of Toyota. We have also been widely recognized by industry analysts who still placed Merkle as a leader in the customer database and engagement agencies wave and the Adobe implementation services wave. Carat, our global media agency at Dentsu International also received a placing in the leader category for global media agencies. Our sustainability recognitions, especially at Dentsu International, also continue to grow as we make greater pledges. We are delighted to have achieved A- rating on climate disclosure for the second year running and been listed again in the FTSE4Good and Dow Jones Sustainability Index. I would now like to hand over to Yushin Soga, Group’s CFO, who will talk us through the fiscal year 2020 financials.

Thank you, Yamamoto-san. I would now like to take you through the financial results for fiscal year 2020. Fiscal year 2020 was a challenging year with the group reporting organic revenue decline of 11.1%. While the full quarter came in ahead of expectations, and the group saw sequential improvement from the second quarter, the macro impacts from the pandemic had a significant impact on our business. Underlying operating profit was JPY 124 billion. As a result, operating margins also came in ahead of guidance as the group successfully stabilized the margin at 14.8%. A net loss of JPY 159.6 billion is reported due to transformation expenses at both Dentsu Japan Network and Dentsu International to support business transformation and from onetime impacts of goodwill impairment. Business transformation expenses will be discussed later. We also announced a buyback of up to JPY 30 billion to improve shareholder returns. Here we describe total revenue and organic growth by region. The pie charts show the regional proportions against group-wide total revenue less cost of sales. The figures below the pie charts show the organic growth by region. It was a challenging year across all regions. Japan is 42% of group revenues and saw a better-than-expected fourth quarter performance, driven by additional client spend at the end of the fiscal year and continued client demand for digital transformation projects. The Americas reported minus 11.3% organic growth. The U.S. market was pulled lower by weakness in media and Creative, although the CXM service line saw an improvement in Q4. EMEA at 22% of revenues was minus 12.4% organic. Media, out-of-home advertising and experiential marketing suffered, although demand remained for CXM capabilities. APAC was minus 8% organic for the full year, but Australia recorded a positive organic growth in the fourth quarter. And in China, decline of organic growth decelerated during the year. The chart shows the quarterly trend of organic revenue from 2019. The middle line shows the group-wide performance with Dentsu Japan at the top and Dentsu International in gray. Group-wide organic growth trend has improved since the second quarter. We expect this trend to continue into 2021. Moving to the performance of Dentsu Japan Network or DJN. Organic growth for the fiscal year was minus 8.4%, although the Q4 comparison was a high bar due to the Tokyo Motor Show and Rugby World Cup in the previous year, organic growth continued to recover as mentioned on the previous slide. The standout performance were -- performers were ISID and Dentsu Digital, both delivering double-digit organic growth as they captured client needs for digital transformation. These are the capabilities that position us well as we enter 2021. On the other hand, group companies more exposed to media and events felt the impact of COVID-19. We recognize that we need to accelerate business portfolio transformation and shift to faster growth areas. Operating margin was 18% with cost control as a countermeasure to the top line pressures and COVID-19. This slide explains the performance of Dentsu International. The pie chart on the left shows proportion of revenue less cost of sales by service line. CXM, our fastest growing area, has now reached 30%. Fiscal year organic growth was negative. However, CXM was the most resilient at minus 3.2%, and Merkle post the year around minus 1%. Decline in the top line was offset by cost control throughout the year, delivering 150 basis points improvement year-on-year. The underlying operating profit was JPY 66.5 billion, plus 0.2% on constant currency basis. I would like to cover the movement of group-wide revenue less cost of sales. Revenue less cost of sales in ‘19 was JPY 939.3 billion. Acquisition contribution was limited in 2020 as we completed 3 acquisitions in the first quarter, showing an increase of JPY 13.9 billion, minus 11% organic growth was JPY 103.4 billion in actual amount. Revenue less cost of sales for the fiscal year was JPY 835.5 billion. This shows the movement of underlying operating profit from the previous fiscal year. The decrease of underlying operating profit from ‘19 to ‘20 was JPY 16.7 billion despite the top line decline of JPY 100 billion. By looking at the items from the left, Dentsu Japan’s top line fell by JPY 31.5 billion, offset by cost savings of JPY 15.5 billion. DI’s top line fell by JPY 73.4 billion, but cost savings contributed by JPY 71.6 billion. The underlying OP for fiscal ‘20 turned out to be JPY 124 billion. As the impact of COVID-19 became clear, we committed to 7% cost reduction versus budget. By the end of 2020, we exceeded that call delivering double-digit cost savings through tremendous efforts made up by everyone across the organization. This page is a reconciliation of operating profit from underlying to statutory. Underlying OP, JPY 123.9 billion and statutory JPY 140.6 billion. The impact from the underlying items totaled JPY 264.6 billion. There are 2 major items: first, business restructuring costs, JPY 78.3 billion under the onetime of items. This includes the cost of New Horizon program implemented by DJN, and the business transformation announced by DI on 7th of December. Second item is a goodwill impairment of JPY 144.7 billion, which includes the goodwill impairment of DI. As a result, statutory operating loss was JPY 140.6 billion. The next slide is on the reconciliation from underlying to net profit. Underlying net profit was JPY 69.8 billion and statutory net profit was JPY 159.5 billion. The difference between the 2 items was JPY 229.4 billion. In addition to the reconciliation of the operating profit by JPY 264 billion, which I went through in the previous slide, earn-out put options had a positive impact of JPY 13.6 billion due to the re-forecast of performance of previously acquired companies in light of COVID-19. Tax-related to this change also cause a bit positive impact of JPY 21.2 billion. Net loss, therefore, was JPY 159.6 billion. Next, cash flow. The underlying OP from 2020 was JPY 124 billion. After items such as the business transformation costs, increase in net working capital, interest and tax charges, net cash flows from operating activities were JPY 59.6 billion. JPY 184.1 billion from the sales of securities, mostly from the sales of Recruit shares has contributed to the improvement of change in net debt, which declined by JPY 155.7 billion. I would like to end my presentation by talking about our outlook. Our short-term outlook remains highly dependent on the variable macro outlook and progress of the pandemic with restrictions still in place across many of our markets, primarily across EMEA and the Americas. We believe that greater clarity on the market is required before earnings guidance can be meaningfully resumed. However, the group faced a strong first quarter comparable due to widespread outbreak of COVID. The group, therefore, expects negative organic growth in Q1 of fiscal year 2021, returning to positive growth on a full year basis. Fiscal ‘21 margin are expected to be broadly flat year-on-year. After my presentation, Yamamoto-san will introduce the new midterm plan for sustainable growth covering the period up to fiscal 2024. The midterm plan includes a dividend policy of payout ratio progressively improving to reach 35% of underlying basic EPS. A review of our non-trading assets will continue and further shareholder returns, we’ll be considering following the sale of large assets by comprehensively considering various factors.

I would now like to move on to our mid-term management plan, sustainable growth through transformation. The impact of COVID-19 has accelerated many trends we already recognized within our industry. The acceleration of digital adoption, bringing with it a shift from advertising and mass marketing to personalize content and customer experiences. At Dentsu Group, we have supported our clients beyond marketing, leveraging our data management and technology implementation skills to help clients transform their own businesses with e-commerce capabilities and B2C strategies, as they look for new ways to connect with their customers -- consumers. As we have widened our capabilities, we have widened our reach within our clients’ organizations. Transformation requires hyper collaboration, not only within our own firm, but within our clients firms as technology, sales and customer service must connect seamlessly. Finally, technology of ensuring and automation are transforming how we carry out work within Dentsu Group and how we can deliver value to our clients. In response to these social changes and to meet changing demands of our clients and as important to stem our own challenges of slowing growth and lowering revenue, we will accelerate our restructuring and business transformation to the maximum extent possible, achieve sustainable growth by transforming faster. I and other members of management are keenly aware of the importance of enhancing the value we provide to our shareholders, clients and employees. I would like to take you through our accelerated transformation, our response to industry changes. In August last year, we announced a comprehensive review to accelerate our transformation across the group. In review will deliver a return to growth and margin improvement for Dentsu Group, whilst benefiting our clients through the delivery of integrated bespoke client solutions. The review launched with 4 clear objectives. As you see on the slide, create a simplified structure, benefiting both clients and internal operations; structurally and permanently lower operating expenses; enhance the efficiency of our balance sheet; maximize long-term shareholder value. We have taken swift action with a number of initiatives already announced. Number one, business simplification. We announced yesterday that Dentsu Japan will simplify its structure into 4 business lines streaming operations. Dentsu International announced late last year the decision to rationalize the number of brands from 160 to 6 global leader brand. This will create a simplified, integrated and more efficient organizations. And that is here for our clients to navigate reducing duplication complexity across the business. Later, Hiroshi-san and Wendy will speak about this. Lowering operating expenses, number two. The transformation announced that Dentsu Japan will generate JPY 21 billion of savings from 2020. The transformation at Dentsu International will deliver permanent cost savings from -- of JPY 55 billion from 2022. Three, balance sheet efficiency. On 30th of November, Dentsu Group announced the decision to divest the majority of its stake in Recruit Holdings, the review of nontrading assets, including the headquarter office in Tokyo to enhance shareholder value continues. Five, we have announced a buyback of JPY 30 billion as we look to improve long-term shareholder value. In 6 months, we have made significant progress, but we recognize there is more to do, and we look forward to updating you on our continued progress throughout 2021. We’d like to continue with business transformation for sustainable growth. Before I start talking about the business transformation, we would like to highlight our vision. Our purpose at Dentsu Group is to realize a better society by contributing to the growth of our clients, partners and all consumers. By realizing our purpose, we will create value for our employees, our shareholders and all stakeholders Our strategy of integrated growth solutions remains the center point of our vision. As we integrate our diverse capabilities across the group, we will deliver top line growth for our clients beyond marketing. In next slides, I will explain where we stand and our competitive advantages in realizing integrated growth solutions. Over our history, Dentsu Group has continued to diversify its revenue and now holds a unique market position across a diverse range of capabilities. These capabilities have expanded from executional work to strategic projects that deliver greater value to our clients. Content, media activation and creative form part of our marketing communication practice. For marketing technology, CXM, systems integration and transformation and growth strategies form part of our customer transformation and technology practices. This is our fastest growth area of the business and where we see greatest potential for the group in the coming years. As digital adoption accelerates, this fits price precisely with our competitive advantage as 1 of the very few integrated global innovators who integrates diverse capabilities. This remains a significant opportunity for the group as we enter fiscal year 2021. All of our capabilities are underpinned by our deep consumer intelligence, the data analytics and insight of consumer behavior. We own multiple layers of consumer data across platforms that position us well versus our competitors. CCS is Dentsu’s planning and insight system based on in-depth studies over 400,000 people across 65 countries. It is the only consumer system that provides globally consistent data across markets to drive insights, strategy, planning and activation. People-driven marketing. This is DJN’s original solution that integrates consumer insights, media planning for performance and customer journey design. M1 is powered by Merkle, used in media planning across the group. M1 is a proprietary personal identity information solution for our clients that improves ROI through people-based marketing. Merkury. Merkury enables marketers, media owners and publishers to own, build and control a cookie less private identity graph, using an organization’s first-party CRM data, cross channel targeting, personalization and measurement. Our global partnerships and alliances across the industry provide competitive advantage. We have successfully improved synergy between the Japan and international business. Salesforce, we are very proud to be named Salesforce’s #1 Global Agency Partner, reflecting the depth of our partnership, which set us apart from other agents and peers. We are the only 3-time award recipient of Salesforce marketing cloud partner of the year. We have over 1,300 Salesforce trained staff globally and 2,000 implementations to date. For Adobe -- or at Adobe, we are the #1 global specialized partner with over 1,400 Adobe trained staff globally. As for Google, we have 1,000 certified Google marketing platform specialists, and we are recognized as 1 of the top 2 largest media partners. Our early investment in digital and data, our expertise is centered in the fast growth areas of the market, where we remain well positioned. 54% of our activities are generated from digital activities. In Dentsu International that reached 68% in 2020, and in Dentsu Japan that reached 35%. 28% of our group revenues are generated from customer transformation and technology services. Results of customer transformation and technology is underpinned by 3 industry leading companies, including Merkle, ISID and Dentsu Digital, which have generated a CAGR of over 20% over the past 3 years, demonstrating our ability to deliver bespoke solutions that address our clients’ needs, combining data, analytics and technology. During the period of midterm management plan, we plan to increase the revenue from customer transformation technology, which is growing 28%, and within the not-too-distant future, we plan to reach to 50% of revenues. This shift will be driven by organic growth, growth from our existing assets supported by investment to develop new products and services and also by targeted acquisitions. Our acquisition track record at Dentsu International shows a consistent double-digit ROIC over the past 5 years. Acquisitions have been a lower priority in 2020 as we have navigated the business through the COVID crisis. We expect acquisitions to pick up again in the coming years with a focus on high-growth data and digital assets in both Japan and the international markets. At Dentsu Group, our greatest asset is our people. And investment in talent development is more important now than ever. To ensure the success of our integrated growth solutions, we must share knowledge between our colleagues, placements and secondments throughout the group, help our people develop broad knowledge and encourages greater collaboration. The benefits of training and investment in our people create a highly engaged workforce, whilst also creating connections and support across the group, particularly important, while the majority of employees are working remotely. The core competencies of our clients have transformed over time. Today, consumers requires companies to provide social value through their corporate behavior and their products. Consumers’ interest in corporate social roles and values has risen dramatically and companies are under intense scrutiny on an unprecedented basis. In the future, companies must ensure transparency and earn the trust and confidence of consumers and the public. A question facing the management of every company is how to integrate the creation of social value with the growth of the business. We provide Dentsu sustainable business solutions based on our unique consumer intelligence utilizing data and technology. This will help clients bring about the growth of consumers and society at the same time that this will support the growth of our clients. We will have the opportunity to summarize and to introduce these initiatives at a later date. However, needless to say, our strict synergy of corporate social rules and values is directed at ourselves. If we are to provide clients with solutions for creating social value, we must first consider our own actions and fulfill responsibility as corporate citizens. Fortunately, Dentsu International has taken the lead in advancing initiatives from such a perspective, and we have received a rating of A- for our CDP rating. To provide Dentsu sustainable business solutions focused on the sustainability of clients and to oversee both, our own sustainability from the same perspective, we have decided to establish a sustainable business Board Chaired by Wendy Clark. As a company with 121-year history as a bridge between business and society, Dentsu Group’s mission to contribute to customers’ business transformation through co-creation value. We believe that by focusing on creating social value at the core of our business strategy, clients can provide better services and solutions globally to the most critical challenges we face in the future. We are confident that this will lead to sustainable growth of Dentsu over the next 100 years. I would now like to hand over to Igarashi-san, CEO of Dentsu Japan Network, followed by Wendy Clark, the new Global CEO of Dentsu International.

Thank you. This is Igarashi speaking. Let me give you a briefing on the Dentsu Japan Network. As Mr. Yamamoto explained, customer needs for digital transformation and business transformation is increasing. According to research, the digital transformation market in Japan will grow 4x over the next 10 years. Dentsu Japan network aims to evolve into an integrated growth partner that promotes together with clients, business transformation, with digital transformation at the center. The areas we have specialized in, including advertising, marketing, customer experience, design, business development and business design are becoming increasingly sophisticated and complex through the use of data and technology. However, to translate our capabilities into business growth, it is necessary for us to introduce initiatives that transcend our traditional expertise inside our client organizations. There is a growing momentum for Dentsu to establish such integrated solutions. A variety of initiatives have already begun, including the establishment of joint ventures with clients. There is a huge opportunity waiting in front of us, and we are very confident to capture the opportunities. In order to grasp these opportunities, Dentsu Japan Network will implement 3 measures for transformation of the group. There are 3 pillars. First, business formation. To become a partner that promotes transformation for our clients, Dentsu Japan will transform its current business domains into 4 new business domains shown here as AX, BX, CX and DX. By maximizing the strength of individual companies within Japan, we are enhancing the value of the 4 new business domains to bolster our competitiveness. By so doing, Dentsu Japan will generate synergies by creating areas of expertise to become an integrated growth partner. In addition, we aim to rebuild the platform business and establish a new company focused on more enhanced and efficient corporate functions. Second, human resource formation. We aim to develop an optimal human resources formation within Dentsu Japan to foster an environment, which stimulates the expertise of our people and allows them to inspire each other. To this end, DJN will consider initiatives such as reassigning talents in terms of expertise and synergy, reviewing the recruitment based on the group’s strategy and to promote the diverse career paths creating talent development opportunities, whilst supporting those who wish to pursue new careers through voluntary early retirement programs. Third, working environment development. We are going to continue to update the work style reforms we have been conducting since 2017. With Dentsu headquarters building in Shiodome, Tokyo, as our core business base evolving into a place where each company can connect with each other, DJN will create an environment where employees can work in a more interactive and efficient manner. We will continue to evolve the working experience for our people by responding to the changes of the social environment. With these actions, Dentsu Japan Network will be an organization that fulfills clients’ needs and pursue sustainable growth. I will now hand over to Wendy Clark.

Thank you, Igarashi-san. I’ve been with Dentsu group almost 6 months now and have focused my time getting to the people, our business and capabilities. And of course, our clients, having spoken to almost 100 of them in the last 6 months. Today, I’ll quickly cover the market opportunity we see for Dentsu International and the imperatives of a transformed business in 2021 and beyond. Starting with the market opportunity. We have a huge opportunity to grow our existing client relationships. We are privileged and fortunate to have relationships with 95 of the world’s top 100 advertisers. That number actually grew last year. This is an incredible advantage and opportunity to expand and grow existing relationships efficiently and effectively. We will do this, what we call integrated growth solutions that our clients are seeking. These are idea-led, data-driven and tech enabled. Next, we’ll differentiate through our market-leading data capabilities and consumer intelligence and identity. This is at the heart of our proposition, knowing people, human beings, better than anyone else. To remain competitive, our services must continue to evolve. Our 3 service lines must respond in different ways. First, media. This is our largest service line, and must continue to evolve. Most crucial is media investment restoration and our new business media pipeline outlook is showing strong year-over-year growth of 30% to JPY 400 billion or USD 400 -- USD 4 billion, which is 80% offensive, which is, again, an increase year-over-year. Next for CXM. This is our fastest growing area, led by Merkle, our industry-leading customer experience, data management and technology firm. Here, we will refine and expand our capabilities and geographical reach through focused M&A. And finally, Creative, we are transforming our Creative offering to respond to clients’ needs post the pandemic. They expect great work at the speed of the marketplace and at an efficient cost. Our Content Symphony offering is seen resonance with clients as we’ve connected 22 locations and 1,000 people to deliver on these client expectations. And finally, we will extend our social impact leadership, as you just heard from Yamamoto-san. In 2020, we achieved our RE 100 commitment, powering our company on 100% renewable energy sources where markets allow. We have also pledged to be a net zero company by 2030 with a reduction in absolute emissions of 46%. And finally, in the third-party CDP, environmental and sustainability assessment in 2020, we led the industry with an A- rating. Next slide, please. These are many crucial aspects of our business transformation in 2021, including the following. It, of course, starts with our people, and we must continue to accelerate our employee engagement. In October 2020, we recorded our highest employee engagement score in 3 years, a very strong result considering our people have been remote for more than 6 months at that point. Our survey provider, Glint, tells us that engaged employees are 12x less likely to leave than non-engaged. Employee engagement is a crucial aspect of our go-forward plan to retain and attract the industry’s best talent. We must convert on our new business pipelines and restore growth. I already mentioned our media pipeline opportunity. Similarly, for CXM, we already have line of sight this year of more than JPY 84 billion or USD 800 million in fully offensive total contract value new business opportunities. Also, we are currently recruiting a Chief Client officer to lead the global integrated growth solutions expansion and conversion. Next, we have a great opportunity to expand on key partnerships with Salesforce, Adobe, AWS, Microsoft, Google, Facebook and others. We have strong credibility in this area already and are partnering closely with these firms, which allows us to tap into their high-growth customer opportunities. As Yamamoto-san already explained, we are the #1 global agency partner for Salesforce, the #3 worldwide partner for Adobe and in the top 2 media partners for Google. Key to our transformation is the optimization from 160 agencies to 6 global leadership brands by the end of 2022 that we announced last year. Simplifying our organization will reduce duplication and cost but also create a better working experience people and our clients. As Marc Pritchard, our client and Chief Brand Officer from Procter & Gamble, so clearly told the industry previously, "Your complexity is not my problem." We simply must make ourselves easier and more agile to do business with. And finally, we will deliver against our targeted cost savings. We have committed to delivering annualized cost savings of JPY 54.7 billion by 2022, with JPY 43 billion of that impacting 2021. We ended 2020 and have started 2021 tracking ahead of our cost savings targets. Thank you for the opportunity to share a brief view of Dentsu International. And now I’ll hand back over to Yamamoto-san.

Thank you, Wendy, and Igarashi-san. I will now move on to our actions for the midterm management plan, how we are going to deliver the strategy. 2021 remains a transitional year for the group with 2022 and beyond delivering a return to growth and improving margin profile. This year, our top priority is to complete several measures to permanently reduce operating cost and shift to our rational and agile organization structure. We think it is important to create a plan that does not assume an optimistic growth outlook. Therefore, our future plans will be continually reviewed, and each time we complete these measures, our goal will be updated. Changes -- not only that changes in our society and living are accelerating, we will constantly keep a close eye on these changes, and if necessary, will review the overall plan and revise it accordingly. As we look forward, we have set our goals for the business against 4 pillars: first, transformation and growth; second, operations and margin; third, capital allocation priorities and shareholder returns; fourth, social impact and ESG initiatives. First is transformation and growth. Please look at the left-hand side of the slide. As mentioned earlier, Dentsu group is now underway of establishing integrated growth solutions, IGS, and Dentsu sustainable business solutions for our clients. We have identified 24 global clients with the goal of expanding the number of services we are delivering to those clients, leveraging our global scale to solve our clients’ challenges and delivering revenue synergies across the group. We will return to M&A with a focus on high growth area, customer transformation and technology. We will make fewer but larger deals than we have in the past. M&A will allow us to focus on scale and synergy as well as adding new capabilities to complement our existing strengths in this area. Our targets for organic growth of 3% to 4% CAGR from 2021 to 2024, and we expect to consistently increase the share of customer transformation and technology from 28% during the period of 2021 to 2024, covered by the midterm management plan. As a result, we aim to reach 50% of group revenues over time. Second is operations and margin. Reducing complexity across our business is to focus for our simplification. Our organization becomes easier to navigate for our clients and our people reducing duplication across the group, eases operations and reduces costs. Our use of near and offshoring increased by 20% in 2020. We will look to build on this success, creating a more flexible cost model for our business, helping us to deliver value to our clients. Technology will continue to change how our people work together, how we team without limits; a reduction in real estate is a consideration for both Japan and the international businesses; standardizing group functions, generating cost synergies as we look to create a more standardized approach to a group functions, including finance, HR, technology and governance. We expect underlying operating margins to improve year-on-year progressively over the years from 2021 to 2024. Third is capital allocation and shareholder returns. Through the sale of recruits, we have secured the balance sheet and have a midterm average of 1.5x net debt EBITDA. Although this may be lower in the short term. Yes, we will invest for growth, both in organic growth through investment in new technology and product innovation, but also inorganic growth through M&A. As I mentioned, we will focus on high-growth areas such as data, analytics and technology. And we commit to progressive dividend payout ratio reaching 35% of underlying basic EPS the next few years. Finally, we will look to make additional shareholder returns. As Soga-san highlighted, we are delighted to announce a buyback up to JPY 30 billion. We will consider additional shareholder returns following exceptional asset sales. Last but not least, I would like to talk about our social impact and ESG commitments. As mentioned earlier, to integrate social impact efforts with business growth strategy, we will establish a Dentsu Sustainable Business Board with Wendy as Chair and report our initiatives related to that theme. I will have an opportunity again to talk the progress. As one of the initiatives, Dentsu Group has committed to reduce 46% of CO2 emission and use of 100% renewable energy by 2030. We are in a people business. Our employees are at the heart of everything we do, and an improvement in our employee engagement score is critical. We commit to support the growth of every individual in our organization through a diverse and inclusive culture and every layer of our organization to be inclusive to gender diversity. We retain the vision of good governance to generate long-term business success. This concludes my explanation. Thank you for your kind attention. Thank you.

Now we will start the Q&A session. [Operator Instructions] So our first question is Nomura Securities’, Mr. Nagao. [Operator Instructions]

My name is Nagao of Nomura Securities. I only have one question. The midterm business plan, midterm management plan. Operating margin, a specific numeric target had not been announced, but various cost reduction initiatives are currently underway, and initiatives to improve efficiency are underway. And if they are implemented, can we expect a higher margin than historical margin? And I think that’s feasible. But you didn’t announce the target of operating margin. Once again, can you explain your concept behind operating margin?

This is Soga speaking. And Nagao-san, thank you for that question. As far as margin is concerned, Dentsu International side, 2022, 15%; and DJN, next year, 2022, 20%, these are the current targets. And transformation is underway based upon those goals. From 2020 -- 2021 to 2024, the new midterm management plan will cover those years. And after completion, if we continue margin improvement during the midterm plan period, we will be able to go back to the 17% group-wide margin level. That’s our expectation.

We go to the second question by Bank of America, Kinoshita-san.

This is Kinoshita speaking. Are you getting my voice?

Yes, yes.

I have 2 questions. First of all, Wendy, I have a question to Wendy. Dentsu International, Merkle is the core company. It’s the growth engine, and the proportion of digital is high. And that had been the trade from the past. But unfortunately, in recent months or terms, organic growth rates is lackluster in comparison to your peers. Why? And in the new upcoming midterm management, how -- plan, how are you going to be addressing that issue? Of course, one key would probably be organizational restructuring, but that’s my first question. Second question is on the Japan business. Page 25 -- sorry, 35. side. AX, BX, CX, DX, so business formation -- transformation was explained. And with that transformation, what would become of your subsidiaries? Will you be splitting or consolidating, integrating some subsidiaries? Do you think that consolidation within the subsidiaries group would be necessary? Or do you think that the existing group structure will do and through deepening the group partnership that you would be able to go such transformation without changing the organizational structure of your subsidies? Those are my 2 questions.

Thank you for the question. This is Wendy. I’ll answer the first one. The CXM service line closed 2020 down 3%, as you know. But Merkle performed slightly better than that. It was only slightly negative in the year. Aside from 2020, Merkle has delivered double-digit organic growth every year since we bought the company and has also delivered margin improvement. And we expect a strong return to growth in this full year 2021 as corporations emerge themselves from the pandemic and look to invest in customer experiences, data-driven and performance-driven strategies. Market forces such as privacy regulations, the death of the third-party cookie, the rise of artificial intelligence and machine learning and the emergence of cloud platforms like Google, AWS and others are causing a shift in the way marketers approach customer centricity. And these forces are driving a movement away from reliance on third-party data and toward the predominance of first-party data and identity, and this is exactly where Merkle excels. At the heart of customer experience transformation, live data transformation, Merkle can help a corporate manage the acquisition management and mining of valuable data that informs customer experiences in real time and in a privacy-safe manner. I’ll also just note, as you saw in Yamamoto-san’s presentation, the most recent Forrester Wave, the customer database and engagement wave where Merkle rated in the leader quadrant. So we feel exceptionally confident that Merkle will restore growth this year and continue to accelerate through the midterm period. Thank you.

Igarashi speaking. Let me now take the second question. AX, BX, CX, DX, we will be forming into 4 domains. And this means group-wide value being further reinforced. And in that process, the position vis-à-vis the existing clients will, first of all, be prioritized. Deepening our existing relationship will be prioritized. And in that process, if we deem that reorganization of the subsidy structure is necessary, as you pointed out, then we will implement those changes. Thank you. That concludes my answer.

Sorry, I have a follow-up to the first question. The response might not have directly responded to my question, although the information you offered was very useful. To date in the digital area, proportion was high, and you own Merkel. And that did not really lead to the competitiveness. That’s probably why you’re being beaten by your peers. So my question was, how are you going to fulfill that shortfall in comparison to your peers in terms of organic growth?

Well, thank you for the follow-up question. I think, as we look at our plans for 2021, we have incredible confidence. I mentioned, during my prepared remarks, we have line of sight right now on more than $830 million in offensive opportunity. None of that is defensive. So close to $1 billion in the new business pipeline, and we feel very confident that we’re going to be able to convert on that this year. We’ve been working deeply with the Merkle leadership team reviewing their strategy and plans. And I can tell you that we are positioned well as we enter this year to perform at or ahead of our peers.

The next question will be from SMBC Nikko, Maeda-san.

Can you hear my voice?

Yes, we can hear you.

Okay, then. I have 2 questions also. First of all, moving forward, you are going to strengthen M&A is what was explained. However, unfortunately, last term, last-last term in a continuous manner, there was a large amount of the goodwill impairment. Therefore, the discipline towards conducting M&A moving forward, what are your thoughts on that? And the goodwill evaluation target, is it the unit is too large and maybe you’re not able to appropriately evaluate that? Maybe you should change it to a unit size that you can do it in a timely manner. And I would like to hear your thoughts regarding this point also. That’s my first question. And also, there was an explanation that there are various pipelines. However, on the other hand, during this COVID-19 situation, this year’s global and Japan for the each individual market, what are your thoughts on it? In Japan, do you have the similar strong pipeline also? I would like to hear the explanation regarding this point. That is all for my question.

This is Soga speaking. Thank you very much. Now for the first point, I would like to answer, first of all, moving forward when we resume M&A and the discipline towards that. First of all, regarding the discipline moving forward, it will be similar to what we have been doing until now. However, we will have a highly set hurdle rate internally, and we will do the valuation of the company that we would like to acquire, and we will decide whether it’s a go or no-go. And also regarding the midterm -- MTMP, we did mention this also regarding the financial discipline. What we have right in front of you, it was decreased by 1x, that is, the leverage, but we would like to bring it up to 1.5x in the midterm and conduct M&A activities. And also the CGU that manages goodwill and others. Well, we divided the international business into 3 CGUs. But as the overall group, we will divide it same as the International business, 3 CGUs to manage the goodwill that has been decided and also the past conducted M&As and goodwill as a result of that. So this fiscal year and in fiscal year 2019 and 2020, we had to record an impairment. First of all, this was the assumption for our midterm plan. There was a change of our business environment, and that has been rapidly changing in the last few years. And that change is continuing even as we speak. So this time or end of 2019, 2020 impairment, it was in the early 2010s when the integration with us and Aegis started. There was an impairment that has occurred in the wide-area type of business, and that is due to the rapid change in the industry. But in 2020, the latter half, starting with Merkle from advertising, the business shifted. And to fulfill that purpose, we have acquired Merkle and the business has been growing. And as Yamamoto-san explained before, M&A moving forward will be focusing on the solution area, and the number of deals -- or the -- or we are not going to go for the number of deals or the size, but we would like to focus on the quality of the M&A deal. That is all.

Maeda-san, this is Yamamoto speaking. Your second part of your question is regarding this fiscal year’s market situation and the outlook of our business and also including the pipeline that we have, what our thoughts are. Was that your question for the Japan business? Or did you want to ask for both Japan and International?

So regarding the pipeline, there was a comment made from the International business already. But to begin with, what is your outlook for the market? Including the international market, I would also like to know. And for Japan I would like to know the market outlook because of the Olympic Games scheduled to be held. And you have a business -- a government-related business and benefit from that. So I just wanted to know your company’s positioning in the market -- the Japan market.

Okay. Understood. Thank you very much, first of all, then maybe from Wendy, she can explain the overall market situation and outlook, including the pipeline and the business outlook. And after that, Igarashi-san will be explaining about the Japan business’s outlook. So Wendy, please go ahead.

Thank you, Yamamoto-san. As you pointed out, I did reference the pipeline opportunity we see in both the Media and CXM business. Overall, from having spent time with so many clients, I would say that there’s a general optimism in the market on restoration of their growth, and of course, ours comes from theirs. In January, we’ve seen an improvement versus December across all regions. And certainly, APAC should recover through improvements from Australia and China. So I would say here, 7 weeks in, allowing for the fact that we have some uncertainty with certainly the pandemic and how and when business exactly will restore, our outlook and that built from having conversations with our clients is a cautious optimism as we go into this year and certainly improvement over last year. I hope that answers your question.

Yes. This is Igarashi speaking, and I would like to explain about the Japan business trend. First of all, for the overall advertisement business, the COVID-19 impact is still becoming an un-stabilizing factor. So I cannot say that it is a strong performance situation yet. However -- but looking back to our group’s situation, we have our proprietary business momentum index, and that is the index towards the presence of our competitors. And against that, we do have a strong movement. Therefore, in that sense, our own pipeline itself, we have a strong outlook towards that. And in addition to this, the Japanese clients or Japanese companies, due to COVID-19, the DX demand that started last year is becoming even stronger. And also, the speed is accelerating. Therefore, for us, we do have quite of a high expectation for that opportunity, and we are confident that we will be able to play a role of fulfilling those needs as an entire group. So in that sense, that part, we have a strong trend. That is all. Thank you.

The next question is by Kondo-san of Citigroup.

I hope you can hear me.

Yes, we can hear you. Q - Hiroki Kondo: This is Kondo speaking. I’m with Citigroup. First question, MTMP has quantitive target organic, from ‘21 to ‘24, CAGR, 3% to 4%. Can you explain the substance of this target? For example, for each year, is it going to increase year by year? And by service, what would be the growth rate for each of the service lines? I look at these figures, and the organic growth rate appear to be relatively low. And during the MTMP period, do you think that M&A -- that growth would be a bigger driver than organic growth? So that is my first question. And secondly, Slide -- Page 29. Customer transformation technology capability was mentioned. Merkle, ISID, Dentsu Digital had been mentioned as group companies. And especially for the Japan business, Dentsu Digital, ISID coming together to provide service, and I think that, that’s the growth area. So for the Japanese market, by tapping on these 3 entities, can you cite some specific examples of wins? And Dentsu Digital, ISID capability, how much are their capabilities important for Dentsu Group? And how competitive are those 2 group companies relative to your peers, competitors?

Thank you very much. This is Soga speaking, and I will take the first question. The growth prospects under the MTMP, CAGR between 3% to 4% over the 4 years, that was indicated in the plan. First of all, for the group-wide situation, International, 3 service lines: Media, Creative and CXM. For Japan, that would be the broad categorization for Japan as well. And the growth area, as I mentioned in my initial remarks, is not the advertising but CXM, and we’re assuming higher growth rate in CXM. The traditional advertising, Media, Creative growth rates would be lower than CXM. So it’s 3% to 4% for the group-wide growth, and that would be mainly driven by CXM. And also, in terms of the timing 2021 to 2024, 4 years, we announced the midterm plan for 4 years. And your question -- or we also mentioned, year by year from late 2020 to ‘21 and ‘22, we will be focusing on transformation. And through such structural transformation, we will implement business transformation that would lead to future growth. So CAGR, 3% to 4%, and of that, growth will be driven. Or what would be driving that 3% to 4% would be in the latter period or the second half of the MTMP period. And with -- you thought that M&A will be the driver for this 3% to 4% CAGR. No, that’s not the case. We will be implementing the transformation. And of course, for business transformation, M&A will be very important. But we’re not going to pursue the number of deals or the size of deal. If there is an M&A necessary for business transformation, then that would be an important M&A. And the intake of growth from such M&A will not be just a simple add on to the targeted 3% to 4%. If, through M&A, we gain new capability in the group and if that new capability is going to be also contributing to transformation, that would lead the group to the growth phase. So I hope I answered your first question. That’s it from me.

Then on the second question -- this is Igarashi speaking, and I will respond to the second question. Our capability in digital solution, Dentsu, ISID and Dentsu Digital, the 3 entities jointly working together to upgrade and elevate the solution capability group-wide. You asked for specific cases. It’s difficult to give names, but auto sector, auto manufacturer or in the food sector, there are some examples. Dentsu had opened up the door and -- through the collaboration between the 3 parties offering integrated solution. That’s quite frequently done. But for automotive and food sectors, it wasn’t that standard pattern. It was ISID or Dentsu Digital which opened the door. And then, thereafter, a tripartite collaboration had led the business. So that such pattern is actually happening, and we’re expecting that these kind of transactions will increase. AX, BX, CX, DX projects will be driving such transactions. In the traditional advertising area or communication area, we won’t be limited to such areas. But system -- or solutions -- digital solutions, these are new areas. And we’re talking with top executives of clients, so we are exposed to diverse windows that enables us to offer a variety of solutions. That is our strength in the Japan market. And further, in the case of the auto project, Merkel’s customer loyalty program is being added on to offer to these clients. So such projects that are underway, so we’re tapping not just on domestic resources but through our collaboration with International.

Next question, Julien Roch of Barclays.

This is Julien Roch with Barclays. So this is one for Wendy. Looking at the performance of Media last year, media was down 15.6%, which was worse than peers. I mean we had indication of performance from Publicis and IPG. Not the exact number, but based on the indication of performance, it would be worse. So I get that you have a very strong pipeline, but historically, in Media, you’ve done better than peers. I wanted to know whether the 2020 performance was market share related or rather account losses related and, if you were excluding the key account losses, your performance was in line with peers or if there was anything else. So if you could give us some color on 2020 performance for Media at the international level, please.

Yes. Thank you for the question. Happy to do that. So I think some of our position can be explained as follows. We have less exposure to some of the high-growth sectors like health care and pharma. We have more exposure to some of the more impacted sectors like automotive and luxury. And then the disposition of our revenue looks quite different to our peers. We are definitely more local and regional with less global. And so while I mentioned to you a minute ago that we have relationships with 95 of the top 100 clients in the world, those relationships have a huge opportunity to be expanded. None of them individually is greater than GBP 100 million, to give you a size component. So when you take that all together, you can see that, during the pandemic, we were disproportionately impacted based on our complexion. That said, you can reference again the remarks that Yamamoto-san made on Carat being in the leader quadrant in the Forrester assessment last year. So it’s not a capability challenge. It’s more of a disposition of our revenue challenge in a very sort of extenuating circumstance like the pandemic. And again, looking forward into 2021 now, again, with 7 weeks under our belt and conversations with 25 of the top consultants in the world, they have all told me to be ready to pitch this year. We know it’s going to be a very busy year. As I mentioned, that pipeline is already 30% greater year-over-year than it was last year. And the complexion of offensive versus defensive actually looks more favorable for us. So we were of 30% defensive last year. This year, again, line of sight as the pipeline looks currently is 20% defensive. So hopefully, that color helps answer a little bit of last year and now going into this year.

The next question is from Fiona Orford-Williams. [Operator Instructions] Fiona Orford-Williams: It’s Fiona Orford-Williams from Edison in London. Can I just check on a definitional basis, please, about what you’re terming customer transformation and technology? Is that effectively everything that is not Media and Creative? And in -- within that segment, could you give us some feel, please, for the break -- for the revenue profile, the breakdown between project and recurring incomes? And then my second question was about the off- and near-shoring. Could you explain to us exactly what that means and what it saves the group?

Sorry, I -- thank you. I was on mute there talking. My apologies. To answer your question about the CXM complexion and how we see that, it is a split between recurring and project-based revenue, as you probably expect. To your offshoring and near-shoring question, we’re now at about 30% of our employees in the CXM business line. And we -- for this year, we expect to continue to grow that across the midterm period. We think that, that will reach somewhere around 50%. Obviously, there’s both an efficiency and then a skills expansion for us. And so that is just a little bit about the complexion of the business. I think what I’ll do is ask Nick to step in here on the actual cost benefit, to the other part of your question.

It’s Nick Priday speaking. So as Wendy said, yes, the CXM service line has already quite progressed in terms of the proportion of staff which are offshored. And by that, what that means typically, we have a large offshore center in India providing services to our business and to their clients in more high-cost territories. There’s a plan to continue to increase that further, which gives us access to more talent to support the organization, but also make sure that we are not just focusing on our margin deliveries of the business that we can be price competitive when we’re pitching for new business and supporting our clients’ own growth agendas. And so that’s something which I think Merkle and the CXM service line have actually done really well in recent years. And we continue to focus on that as a go-forward strategy to make sure we are competitive and can grow our revenues as well as delivering an efficient business model. And we are obviously seeking to do that same thing across the Media and Creative service lines as well as across our business functions. So that offshoring approach and near-shoring approach, making sure we’re operating from cost-effective locations is a key underpinning strategy supporting our margin progression into the future. Thank you.

And maybe I’ll just follow back up to the first part of your question, I apologize, on the -- what’s included in customer transformation and technology. For the International business, that is all of the CXM business line. So included in that is customer experience; obviously, the data management piece; the cloud-based services; martech; commerce; loyalty; the expansive nature now that we’re seeing, again, as you know, the fast-paced growing piece of our business, end-to-end solutions. But we then, of course, have and enjoy these partnerships with Salesforce, AWS, Adobe and others to kind of bring to the market. So I hope that defines it for you.

And you have asked the definition regarding CT&T. And if you want to know the definition for DJN, Mr. Igarashi explained about ABCDX, and BCDX out of that -- all of that are included in CT&T. That is all.

Next question, Daiwa Securities, Ishihara-san.

This is Ishihara of Daiwa Securities. I hope you can get my voice.

Yes, we hear you.

I have 2 questions. First, Page 15, cost reduction impact. This is a question for confirmation. 2021, JPY 50 billion; 2022 and years after between JPY 70 billion to JPY 80 billion of cost reduction. If the market remains flat against 2020, JPY 50 billion and then, in following years, JPY 50 billion, JPY 80 billion revenue growth. But if market grows, then can we expect further improvement? So that’s my first question. Second question. Last year -- since last year, you’ve been disposing of Recruit’s shares. And for Shiodome headquarters, there have been talks of disposal, and you are setting further asset sales. Total cash in, will it go beyond JPY 500 billion? That’s my estimation. So the proceeds, for what will you be investing after you obtain such proceeds? Will you be reviewing capital policy on group-wide basis? You need to invest in digital and growth areas, and that may lead to your concept as such. So those are my 2 questions.

Soga speaking. Thank you for the questions. As you understand, DJN and DI, on a full year basis, cost reduction, JPY 70 billion or higher, yes, we will be achieving that goal. First of all, we solicit your understanding that 2019 revenue less cost of sales and the cost base existed, and then 2020 came, the COVID pandemic, so revenue declined. And on the other hand, especially in the international market, and this applies to the Japan market as well, but onetime-off cost reduction has led to operating margin for International being kept flat and reduced for Japan. Especially for International, 2021, if nothing is done, then the cost will bump up again, which was a onetime-off reduction. And for the Japan market as well, the repercussion or backlash may occur. So for 2021, the Japan margin will be impacted by such repercussion. To buffer such onetime-off element, ATP, accelerated transformation plan, will be implemented on a group-wide basis, and if so, over JPY 70 billion permanent cost reduction is doable. So in comparison to fiscal 2019, the cost reduction was very significant. But of that cost reduction, much of it was through onetime-off factors, and we want to make that routine, through ATP, permanent. So the answer to your question, it would depend on what you -- level you are expecting. But will this apply to increased operating profit in ‘22 and ‘23? If that’s what you’re thinking, no. Revenue will improve and onetime-off cost reduction will be made permanent. And as a result, operating margin for international in 2022, 15%; for Japan, 2022, 20% operating margin shall be attained. So that is the broad direction that we have drawn. Thank you. And Soga speaking again. Let me also take the second question. Shiodome headquarters was mentioned. You referred to the headquarters building in Shiodome. Nothing has been decided beyond what we have announced, so it is not possible to make any comments on numbers. Going forward, as part of comprehensive review of balance sheet, nontrading asset review will continue. And we will use the proceeds for investment in businesses. And at the same time, on a regular basis, we will think about benefits returned to the shareholders. We mentioned the midterm management plan. Going forward, we will implement transformation and then bring that to the growth phase. That would require us to go through M&A initiatives as well. So through nontrading asset disposal, how much proceeds will be gained, that put aside, going forward, the proceeds that we gain will be used for investment, shareholder benefit and transformation implementation. In the midterm, that would be our direction. There could be various events, asset sales or -- on midterm management plan. We will be, on a regular basis, monitoring and reporting you the progress. And through such initiatives, in what way will the proceeds of disposal of assets be used? You can confirm when we update you on our progress.

[Operator Instructions]

Can you hear me? Kishimoto of Mizuho Securities.

Thank you. Yes, your voice is coming through.

I have an additional question on M&A. How much this year, how much next year, it would depend on the deals in the pipeline, so I don’t think it would be easy for you to comment. But as a broad strategy, in comparison to historical years, do you intuitively think that it won’t be as significant in terms of the amount you would be spending? And on Page 25, solution area, in comparison to the past, competition over M&A. You could be competing with peers other than those who were competing in past M&A deals. It would depend on the size of the goodwill. But is there the risk of M&A leading to further increasing on your balance sheet? So my question is on the size of the assets on the balance sheet and the competition landscape of M&A.

Thank you for the question. This is Soga speaking. On M&A, when we think about capital allocation, we think about the balance of various factors. We have to live up to financial discipline, shareholder benefit and growth investment. These 3 factors have to be well balanced. In the short run, by maintaining financial discipline, we will implement transformation. So as far as M&A is concerned, we are cautious. But having said so, transformation requires M&A. M&A is indispensable for transformation. So as we proceed with transformation and go into the growth phase, naturally, our position on M&A will gradually change, in terms of amount we pay as well. And as I said, we will be reporting to you the progress against the MTMP on a regular basis so you can confirm our progress in M&A as we do so. Now it’s 2 new players that are coming into the competition landscape for M&A, and with digitalization, people are looking for similar new capabilities. So we’re not just sitting back and resting assured. But I think we do have a uniqueness and, from the target M&A company, they may feel our uniqueness attractive. They are looking for the best group to be bought by, and we will be advertising or appealing that. In Japan, Dentsu brand, Dentsu Digital and ISID are strong brands -- Septini as well. So there could be target companies that want to work within those organizations. And overseas, Merkle, CXM-, CT&T-leading company, is part of the group. And by communicating those uniqueness, we could offer very attractive conditions outside of the amount we pay. And on goodwill, we’re in this kind of business, so to a certain extent, we have to tolerate goodwill increasing. But of course, we will continue to control goodwill, and that is a priority agenda for the top management of the group. So we will be stringently monitoring each business line. Do we continue? Do we withdraw? Do we exit? We will continue to implement even more stringent control over goodwill. Thank you.

[Operator Instructions] There seems to be no further questions. So with this, we conclude the earnings presentation of Dentsu Group for fiscal year 2020. Again, thank you for your participation. [Operator Instructions] Again, thank you for listening. Thank you very much. Thank you very much.