Dentsu Group Inc. (DNTUF) Q4 2024 Earnings Call Transcript

Welcome to the Dentsu FY 2024 Earnings Call. My name is Moreshima [ph]. I'm from the Group IR 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.

[Foreign Language]

Global CGO and Global CFO, Dentsu, Yushin Soga.

[Foreign Language]

Global COO and Chairman and Acting CEO of Dentsu Americas, Giulio Malegori.

Hi. I'm Giulio Malegori.

CEO, Dentsu Japan; and Deputy Global COO, Dentsu, Takeshi Sano.

[Foreign Language]

They 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 integrated growth partner for many clients based on the trust we have built over a 120-year history. At the same time we are updating a wide variety of capabilities mainly in the marketing field including consulting and BX. 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 a 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 plans, we are focusing on improving profitability through reevaluating underperforming businesses and rebuilding our business foundation. In fiscal 2024, in addition to the approximately JPY 20 billion share buyback that we have completed, we set the annual dividend per share at JPY 139.5 the same amount as the previous year. In our new midterm management plan we will also aim to achieve stable returns to shareholders. Globally we expanded a role for the jury 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 valuations we were named as a leader in the Forrester Wave Media Management Services. I will now hand over to our Global CFO, Yushin Soga to explain our financial results.

Thank you, Igarashi-san. Hello, everyone. This is Yushin. I'll now explain our financial results for FY 2024. I'll start with our key metrics. Organic growth rate for FY 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 JPY 1191.4 billion, while underlying operating profit increased 7.8% year-on-year to JPY 176.2 billion. 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. 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 a growth driver. As a consequence, we were able to enhance our capability and created a number of global success stories. Accordingly, underlying basic EPS increased by 4.5% from FY 2023 to ¥355.24. Dividend per share for FY 2024 is ¥139.5, 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 and a net loss of ¥192.2 billion due to the recording of a goodwill impairment loss of ¥210.1 billion 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 the 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 FY 2024. However, this also has the aspect of reducing future uncertainties and contributing to a healthy balance sheet for the start of our new mid-term management plan. The initiative for the international business will be explained as part of the mid-term management plan. Next, I would like to explain the 2024 full year results by region. While Japan and EMEA posted growth, the Americas and APAC remain negative. More specifically, the U.K. and the U.S. reported negative organic growth. Well, 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 full year net revenue reaching a record high for the fourth consecutive year. In addition, underlying operating profit also reached a record high. In FY 2024, 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 FY 2024, 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 account for around 30% of group net revenue, remained 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 FY 2023, but the slow recovery in CXM is still weighing on our performance. In FY 2024, 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 FY 2024, media stayed broadly flat year-on-year. 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 announcement. The three months of the fourth quarter showed a negative growth rate mainly due to the slow recovery in CXM. Media, however, reported improvement year-on-year. EMEA had a positive organic growth rate for the full year. This included the one-off financial impact in the DACH 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 U.K. and Germany experienced continued client 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 growth. 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 spend. CXM resulted in double-digit organic decline for the full year. Media in FY 2024 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 FY 2024 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 year-on-year. Next, I will explain the changes in the group's underlying operating profit from the previous year. Full year underlying operating profit increased from JPY163.5 billion in FY 2023 to JPY176.2 billion this was primarily due to an increase in net revenue. Let me explain in detail. Net revenue increased by JPY16.4 billion, which includes a good performance in Japan, a reversal of the one-off financial impact at the DACH cluster in FY 2023, as well as a net increase from Tag and other subsidiaries acquired in FY 2023. The decrease in personnel costs of JPY2.8 billion is mainly due to the cost management initiatives in the international markets partially offset by internal investments in talent. Operating expenses increased JPY6.2 billion. Other 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 FY 2024 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 JPY235.3 billion resulted in a net loss of JPY192.2 billion for the year. Most of the impairment is a goodwill impairment recognized in EMEA 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 FY 2024 to be JPY139.5, 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 Igarashi-san. Thank you.

Thank you, Yushin. So let me now explain our mid-term management plan 2025 to 2027. Today, I will cover the point shown on the slide. So let me start by outlining our thinking for the new mid-term management plan. We've held achieved 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 reexamining 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 center transformations that shape society. This vision remains unchanged in the new mid-term management plan. However, as Yushin 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 onwards, 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 WACC, 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 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 direction and challenges behind the formulation of this midterm management plan. As I mentioned earlier, we failed to achieve the organic growth and operating margin targets of the previous midterm 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 emphasize M&A. Specifically, lack of integration within our organization following M&A led to increased complexity and silos and we struggle to generate sufficient synergies, resulting in a high cost structure. We also recognize that one of our challenges was not having made enough progress in realigning our business portfolio. As I have explained in previous financial results announcement, we have already begun taking countermeasures to address these issues. However, we will accelerate these efforts under the new midterm 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 reexamining 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, reevaluating underperforming businesses and rebuilding our business foundation. Regarding the reevaluation of underperforming businesses, we are implementing thorough and swift measures having considered 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 reevaluating 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 midterm 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 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 market. 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'll explain our business strategy for restoring our competitiveness. Our group's 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 midterm 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 strength 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 further differentiation. To strengthen the capabilities of our international business we 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 US. Adobe GenStudio dentsu+ 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 increased our competitiveness of media. These initiatives will be led by; Giulio Malegori, Chairman and acting CEO Dentsu Americas; Beth Ann Kaminkow, 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 US. 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 utilize this 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 client -- 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 in 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 midterm management plan. We will restore ROE which has been on a downward trend during the previous midterm 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 goal 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 onwards 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 and net profit at ¥10 billion 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 midterm 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, the same as in fiscal year 2024. To summarize, we have formulated a midterm 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 reevaluating 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, 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 from Nagao-san from the BofA Securities. Please unmute yourself.

Thank you for selecting me. This is Nagao from BofA Securities. I would like to ask two questions. And quite a significant loss -- or the impairment loss that you booked on this occasion. And as we enter into a new midterm management plan, you wanted to essentially clean away unprofitable asset. 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 yield 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, Nagao-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 how we've been able to essentially clean away all of the profitable assets. I will respond to that question. And I'll ask Soga-san to add any -- make any additional comment. And second question was in regards to the new three-year midterm management plan. The 2025 may be a slow start and more start, but what is the expectation for 2026 and 2027, particularly in regards to assumptions on profit. 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 the Mr. Soga Yushin, has explained before, in registering this impairment charge, we did actually assume a quite a conservative stance in coming up with the projections for the future 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've explained, we are certainly doing a reexamination 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. And your question was that, we took launch impairment charge on this location, how we've been able to essentially clean away a profitable business. And well, to this question, it's probably mentioning to you, but we -- the background to recording the impairment loss of goodwill. Now, as Igarashi-san has explained for the midterm management plan we use the rational -- the business plan that the management things. 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 had to use more conservative stance than what the management has expected. And so that was behind the impairment charge on this occasion. So -- so it was conservative business plan that actually reflect the risk on a consolidated basis. However, in the MTMP, the Midterm Management Plan, the business plan included is something that the management of 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 the same payment loss as quickly as possible. When you ask us to whether we have been able to clean away, well, this is an accounting practice. And so to completely clean away the non-performing business 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 midterm management plan, as Igarashi-san explained before. Now for us to do this, we need to lower the cost base. And we also need to -- I suppose they 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 complete the clean way. Well that is what is we're going to address is 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 FY 2026 and 2027? Well, for 2027, we are aiming for the levels that you can see these are the goals that we've set. As I explained in my midterm management plan presentation before, what we will do is first, do a review, 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 consequence. In the end by 2027, but during 2026, we are going to make these loss-making markets to zero, and we 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.

Mr. Nagao. Thank you very much. The question is from Ms. Fiona Orford-Williams from the Edison Group. Please go ahead. Thank you. Fiona Orford-Williams: Thank you very much. I'm 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 market. 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 from -- in order to grow globally by growing locally so concentrating on growing the local clients. Does that mean you're actually withdrawing from the large global picture arena and leaving that to the beer moths of the industry? Thank you.

Fiona-san thank you very much for your question. Regarding your first question is 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 have to ask Giulio, the COO to support the answer. And the second question, are we going to concentrate on the local 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 got us you will like respond. First, related to the CXM. As you pointed out the FY 2023-2024 performance from that result at each market globally, it shows that CXM is struggling in each market. As you 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 spend has also decreased. And apart from these external factors and environment for us regarding CXM -- we -- which domain can respond to the clients needs and which domain 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 Giulio, if you have any additional comments, please go ahead.

Thank you, Igarashi-san, and thank you Fiona for the question. To bid Igarashi-san comment, yes, there's been definitely pressure from the market condition in both the US and the other international market, but it's also on our side internally. So how we are reacting and how we are reacting. 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 CXM commerce, especially on the content supply chain. Igarashi-san, just mentioned about, GenStudio dentsu+ as an example, experience design and commerce itself. To that regard, also the new 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 data analytics are important itself the data platform, but also the analytics to feed 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 will be promotion or loyalty program in itself. So that's as far as the offering the product development is concerned. The other move referring for instance today to US 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. We have a new CEO. We have a new leader for CRM. We doubled down on data platform analytics, we’re new leader. And last but not least, a new CEO for the Miracle operation. So we believe that the combination of renewing the offering and transforming the leadership will 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 four accelerated clients globally. And with them, in a thorough manner, we are sharing the growth solutions and working together with them as their partner. And 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 grab the situation of each client and each market will be the partner of that client. And each partner client being able to globally grow, 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 midterm management plan. So, walking together with our global client, we will strengthen that part. But it's not -- 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. Q – Eiji Maeda: 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 JPY 43.6 billion 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 JPY 43.6 billion 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 JPY 80 billion on this occasion. And so, onetime the impairment or the structural the reform. Of course, if we don't have that, the gap should normally be between JPY 30 billion to JPY 40 billion, but why are you expecting JPY 80 billion? Are you still trying to still restructure some of the unprofitable business, which is expected to book some expenses? I'm sure, you have some of those. And if you could some details numerically, that would be my first question. And the second question, and how to think about the numbers for the final year of the midterm management plan? ROE 10% or around 10% range. Operating cash flow of JPY 140 billion and may be intentional, but underlying operating profit, that would be around JPY 180 billion, 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 we 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 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 midterm management plan, what is the message that you wanted to communicate to the market based on these -- the numbers you have set to achieve for the final year of the midterm 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, JPY 43.6 billion. And you wanted the breakdown of this inclusive of SG&A and this JPY 43.6 billion, how this was calculated. You wanted to understand the breakdown details. And also between operating profit and the underlying operating profit, the gap between the two is JPY 80 billion. 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 midterm management plan. What are the 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 JPY 180 billion is the probable amount. But is that amount appropriate or not? And I will ask Soga-san to respond to that question. But I will respond to the second question first, and I will ask Soga-san to supplement.

So this is Soga speaking. Thank you, Maeda-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 JPY 50 billion of the structural reform and the cost, which is part of the non-underlying item. But underlying items from last year, we have been making internal investment. And as Mr. Igarash has explained, we will work on integration that was not fully sufficient. And so it does include things like IT investment or to create group synergy, there are investment required and also investment for people as well. These are investment for our growth in the future. That's about JPY 20 billion that we are assuming. And on a year-on-year basis, as explained in the presentation before, that 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 onetime 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 same applies to part of the US business as well. So when we announced our result at the third quarter, well, equivalent 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 JPY 20 billion of internal investment, Japan and US, 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 JPY 50 billion of cost. So in addition to that cost, around JPY 20 billion is the depreciation of tangible fixed asset or the depreciation of the office lease and that's probably about JPY 20 billion in total. So when you add all those, that's JPY 70 billion, you said JPY 80 billion. But of that, you can actually account for JPY 70 billion. Now if my response was insufficient, please ask a question again.

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, the -- 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 realize. And in the process of getting there, what are we to make improvement, what 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 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 the loss-making markets and talked about reexamining unprofitable business we need to go through those steps. And by doing so what type of growth and profit can be secured? And we wanted to reorganize the process and work on that, so that we are able to reach the mid-teens range for ROE. And this is to respond to the expectations of the market participants is a goal for management. And so that was the basis upon which we have identified this has been the number for the final year of our midterm management plan. Now on that basis, Maeda-san, in assuming an underlying operating profit you kind of asked as to whether this is JPY 180 billion or so? On that part I'll ask Soga-san to respond.

This is Yushin Soga speaking. In 2025, so we are going to execute large structural reform to lower the cost base and achieving growth on top of that. We will achieve the mid-term the KPI that Igarashi-san has explained earlier. JPY 180 billion, 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 our growth rate. That is what we set out to achieve. As to whether it's going to be JPY 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 -- and the JPY 180 billion. 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 the 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 JPY 43.6 billion next year, and the JPY 20 billion for IT, so it's going to be expensed this JPY 20 billion and also the personnel cost reduction in U.S. the rebound from that should see some increase in cost and there is also organic growth. And all-in-all, the cost against the underlying operating profit will increase by JPY 43.6 billion. So is that the right understanding?

Thank you very much, Maeda-san. In terms of internal investment, it's about JPY 20 billion. 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. And 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 JPY 20 billion of cost on the P&L, and we will allocate this to the various regions and we'll use that as when necessary. So that's the thinking opted. You talked about the US and this is not too large it's about JPY 2 billion and rebound in Japan is larger vis-à-vis the rebound in US in the fourth quarter. And it's kind of temporary or it's a JPY 7 billion that we were able to book fortunately. But when we look at the fourth quarter amount here the operating margin increase was about JPY 10 billion in terms of personnel 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 amount that amount. As to whether the cost is going to increase or not? I don't know, but that's 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 your next question from Nomura Securities. Mr. Harahata, please.

This is Harahata from Nomura Securities. This will be a follow-up question to the previously asked question. So I have two questions. The first question is related to Page 7 regarding the impairment that you recognized at this time, this was opinion by the outside audit firm. And the reason you say 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 EMEA? And second question is on Page 38 JPY 50 billion with rebuilding the business foundation and for internal investment JPY 45 billion can you elaborate on that? And what is my concern is JPY 35 billion to JPY 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 you wanted 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 as 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 billion to ¥50 billion positive effect or a positive outcome. Will there be any other additional expenses that may incur? Soga will explain that as well.

Mr. Harahata, 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 a constructive discussion with them. We do reach the financial results and we process the financial items. This time we created the new Mid-Term 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 shifting over to economy of scale. If we include all that, the industry environment is very difficult or tough and compared to that they understood -- the KPMG understood the content very well. And regarding the content, KPMG has not placed the same thing. 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 Mid-Term Management Plan 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 Mid-Term 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 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 the EMEA and Americas net revenue and the operating side.

Excuse me for that. This is Soga speaking once again. And the budget for 2025 for the International business, it's most 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 impact to the business due to that. So Americas -- 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 would like to answer.

Regarding the internal investment in 2025, JPY50 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 reexamine that. And in line with that function there are things that will be simplified. And the region headquarters will be reexamined from the perspective of simplification and also the organization -- simplifying the organization is from the perspective of cost reduction. And within that, personnel expenses will also be reexamined and so the cost control will be done there utilizing our AI and various systems also will be organized, so that the business process can be standardized within simplifying the organization. And also regarding the JPY45 billion of internal investment as Soga 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 or connect them in effective way and make it more of an efficient one and to do so, we are expecting JPY45 billion and in total JPY95 billion. And as you see on page 30, the JPY35 billion to JPY50 billion, the JPY50 billion cost will be spent to a standardized 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 investment 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 Abe-san from Daiwa Securities. Please unmute yourself.

This is Abe from Daiwa 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 the 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 Abe-san 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? And 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 that we lack right now if there is any? And together with the focus area, so we would like to give some information. And for that part I would like to ask Giulio to respond. Now to answer your first question, so insufficient or non-thorough integration as you have indicated we have been working on One Dentsu and based on one operation model. And we have been pursuing a new integrated model thus far. However, what -- well 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 full service line, we were looking at the individual the P&L. And so this has caused quite a strong silo effect. And of course, we are heading towards new operating model, but to fully remove the silos and to the reorganize capabilities in reflection of the 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 very clear and so in that regard, we can accelerate our initiatives to address that going forward. In regards to your second question, could I ask Giulio to respond please in regards to how we are going to strengthen media domain.

Thank you for the question. This is Giulio Malegori speaking on the media one. I think to ask the question where we are focusing and on an eventual lack of capability or insufficient capability as Igarashi-san said in the overall introduction of the strategy, we're going to put the media business at the center of the delivery of IGS and in doing that, there would be specific focus area on media 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, recently Forrester named Dentsu Media as a leader by saying that Dentsu+ medium market innovation at the center of its client audience and brand activation. We will accelerate that with the use of technology and AI. In a few months ago, we launched the Merkury data powered audience builder that is really helped to offer integrated advanced capability to be able to turn inside on consumer into action and into activation. We are all aware that why Media is at the center because, there is a convergence on that. It's not just media activation, is data, is CRM, ultimately is commerce. So we are putting our focus on that and invest in our 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. We are getting close to the schedule ending time. So the next question will be the last question. BofA 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 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 3. In the next three years, more than shareholder return, you're going to focus more on internal investment. I just wanted to hear 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 if 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 a very top transformations. And based on the thinking of -- though it is a special year we want to maintain the shareholder return and maintain the dividend at ¥139.5. 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 capital that we can allocate, of course, we will consider that. And regarding M&A, we've been -- as I explained in the midterm management plan explanation, we'd 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, if there may be situations where M&A is necessary. 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 Soga speaking. Thank you very much for your question. Up to now or so far have been talking about capital allocation. Simply put, we will make investment -- 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 a 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 a 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 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'll create a lean organization that will support that ¥1.2 trillion appropriately. And in addition to that as what was explained in [indiscernible] 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'll start turning then we would like to think about the shareholder return or additional shareholder returns. Whether that's going to be from 2027 onwards or not? Well, we'd like to create a situation where we will be able to do this as soon as possible.

Thank you very much for your 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. Thank you.