DNTUY (DNTUY) Q1 2026 Earnings Report, Transcript and Summary

[Interpreted] Good morning, good afternoon, good evening. This is Takeshi Sano speaking. I took office as Global CEO at the end of March, and I'm delighted to welcome you to Dentsu Fiscal Year 2026 First Quarter Earnings Call. Today, Shigeki Endo, our Global CFO, and I will be giving presentations. Following our business and strategic update and Q1 financial update, we will move on to a Q&A session. Before moving on to the financial results, I would first like to speak about the direction our group is aiming for. Our group's goal is to become a growth partner that realizes clients' medium- to long-term growth. The 3 pillars necessary to achieve this are strengthening client centricity, enhancing agility and accelerating collaboration. At the core of our business is client centricity, a customer-first mindset. The marketing expertise we provide in media, creative and the wider marketing services we offer are not the goal in themselves. They are the means. The true objective is the sustained growth for our clients' businesses and brands. Therefore, it is critical that we go beyond responding only to today's clients' needs to proactively anticipating challenges they have not yet identified and delivering the most relevant solutions at the right time. To realize this client centricity, agility and collaboration are essential. On agility, we are accelerating decision-making and reducing the distance between management, the front line and ultimately, our clients by streamlining management layers and moving to a more agile structure. Success depends on being the right scale, large enough to deliver impact yet agile enough to remain fast and flexible. In addition, we are accelerating collaboration to create distinctive value, bringing together the diverse capabilities of the group as well as those of our clients and partners. This enables us to deliver seamless end-to-end offerings from strategy through to execution. Together, these 3 pillars strengthen our ability to support sustained growth for our clients. Let me now move on to the highlights. In the first quarter, we posted organic growth of 0.8% and operating margin of 12.8%, both slightly exceeding our expectations. Statutory net profit was JPY 40.2 billion, largely impacted by the recording of gains from the sale of Dentsu Ginza Building. While our full year guidance is reiterated, we will closely monitor our clients' business conditions, marketing demand and other factors amid increasing uncertainty in the global economy. In our international business, both initiatives, rebuilding our business foundation and revaluation of underperforming businesses are progressing steadily. Later, I will elaborate on the optimized operating structure in EMEA and partial divestment of a certain business in the ANZ cluster. Here are some of our recent client wins. Globally, we won the media pitch for Heineken, further expanding our partnership. In the Americas, we secured new business from Farmers Insurance for creative and were appointed as the integrated media and creative AOR for i-Health. In Japan, we were selected as the marketing strategy partner for a new project with MUFG. In EMEA, we won Samsung Electronics Europe's CRM transformation project across 16 markets. In addition, Tapestry appointed us for media across EMEA, APAC and Japan. In terms of industry awards and recognition, we continue to deliver strong results across multiple disciplines, including being named Network of the Year for the 10th time and the fifth consecutive year at ADFEST as well as earning recognition in creative, sports and entertainment and other categories. Next, I would like to explain our progress in rebuilding our business foundation, focusing on the reorganization of our operating structure in EMEA. Effective July with the aim of optimizing our operating structure, we will review the role of EMEA headquarters and transition to a simpler and more efficient organization. At the same time, 7 clusters previously operating under EMEA will be consolidated into 3, improving the efficiency of regional headquarters function and accelerating decision-making. An additional annual cost reduction of approximately JPY 1.7 billion is anticipated through these initiatives. Under the new structure, each cluster CEO will report directly to myself as Global CEO. This will strengthen alignment with our global strategy while also enabling faster decision-making across markets and clusters, ultimately enhancing the value we deliver to our clients. We are already seeing concrete results, including our success in winning Heineken's global pitch in which I was directly involved. Next, I would like to explain the business transformation underway in Australia and New Zealand, also known as the ANZ cluster. As part of the business transformation in this cluster, we have decided to divest the CRM business, which is part of our CXM business. This divestiture will lead to a decline of approximately JPY 2.5 billion in annual costs. In addition, it will create room to further reduce function-related costs associated with the divested business by several hundred million yen annually going forward. The transaction with the prospective buyer is scheduled to close in the third quarter, after which these benefits are expected to materialize. At the same time, within the CXM business, we continue to position the Experience, Commerce and Data and Technology domains as critical capabilities for future growth. Therefore, these areas are not included in the divestiture and will continue to be operated in an integrated manner alongside our Media and Creative businesses. We are also moving forward with the integration of our Media business brands, creating a structure that enables integrated service delivery by connecting media, creative and data capabilities across functions. The ANZ region has experienced organic decline for 3 consecutive years. However, through business transformation initiatives, including the measures we announced today, we expect the region to return to low single-digit growth from fiscal year 2026. Next, I would like to share the progress and key achievements of our International Media business. To further enhance our media services, we are particularly focused on 4 key areas. First, we are advancing AI-powered media planning. Second, we are strengthening our proprietary digital solutions. Third, we are enhancing our capabilities in retail media. And fourth, we are strengthening our capabilities in social media. Through these initiatives, we have already delivered tangible results, including wins in multiple client pitches as shown in the box section below. Finally, let me touch upon our approach to AI. Our group's vision, AI for growth, combines human intelligence with AI capabilities to drive growth for both our clients and society. We do not see AI simply as a tool for improving efficiency. Rather, we position it as a driver and support for growth and innovation of both ourselves and our clients. What I feel in my conversations with client leaders is that they are not simply looking for advanced AI capabilities. What they are truly seeking is their business growth. They are looking for a true partner that goes beyond the boundaries of advertising to address their broader business challenges by integrating AI, data, creative and media to drive business transformation and growth. To identify potential business issues as well as the countless challenges that may emerge in the future and to solve them quickly and effectively, AI alone is not enough. What is equally essential is humanity or what we call people intelligence. That is why rather than combining AI within a proprietary platform, we place importance on building a flexible and open system that can provide the optimal environment tailored to each client data systems and usability needs. In this area, competitive advantage does not come simply from scale. It comes from being an organization with the right scale, one that combines the agility to move quickly with the expertise needed to create real impact. To give you some specific examples, let me first introduce the initiatives underway at Dentsu Japan. In Japan, some of the group's most advanced initiatives are already being implemented. Currently, within Dentsu Japan, more than 4,500 AI agents and over 1,300 AI applications are being used, supporting both the enhancement and efficiency of client operations. In addition, Dentsu Digital solution, Mugen AI Ads, which optimizes the digital advertising production process has already been implemented in projects for more than 200 companies, delivering an average 1.5x improvement in advertising effectiveness. We are also rolling out a variety of solutions that combine humanity with AI intelligence. These include people research, which enables virtual quantitative research across personas, representing a population of 100 million people, AI for growth Canvas and AI agent platform and AI for growth creative lines, which incorporates the knowledge and skills of creatives directly into the production process. Furthermore, later this month, we are planning to announce AI For Growth 3.0 as the next update to our AI strategy. As a representative example from our international business, I would like to introduce the progress of dentsu.Connect and Client IQ. Dentsu.Connect is scheduled for a further update in the fourth quarter this year. But even in this current version, more than 1,900 clients have already enrolled. Dentsu.Connect is our unified operating system that seamlessly connects every application across media, creative and our customer experience capabilities within our organization. By combining this platform with AI, we help clients enhance brand value and maximize business performance. In addition, we have launched Client IQ, a chat-based AI agent tool that captures and shares our internal expertise and specialist knowledge. Our planners can use it in a conversational chat format, and it even supports the creation of client proposal materials. This strengthens our ability to deliver proposals to clients that are both faster and more insightful. That concludes my update. As I promised in February, we are moving swiftly to address key management challenges and will continue to deliver steady results. We are currently reviewing our midterm management plan in which we have redefined certain objectives and associated targets, and I intend to provide an update in the coming months. Now our CEO (sic) [ CFO ] Shigeki Endo, will give you an update of our financial results.

[Interpreted] This is Shigeki Endo. Please allow me to take you through the consolidated financial results for the first quarter of fiscal 2026. I'll start with the key metrics. For the first quarter, we posted organic growth of 0.8%, slightly exceeding our February expectations. This was due to the strong performance in Japan, which also exceeded expectations. The performance of the 3 international regions were in line with our expectations. Consequently, and due to the weaker yen against the major currencies, the group posted increases in both revenue and profit with consolidated net revenue increasing by 2.7% year-on-year to JPY 295.1 billion and underlying operating profit increasing by 11.5% to JPY 37.8 billion. The double-digit profit growth was realized due to the increased profit in the Japan business as well as due to the controlled SG&A expenses in the 3 international regions. Benefits from our efforts to rebuild business foundation also contributed to a certain extent. As a result, we posted operating margin of 12.8%, 100 basis points higher than the same period last year, slightly exceeding our February expectations. Underlying basic EPS came to JPY 75.43, increasing by 18.4% year-on-year. On a statutory basis, operating profit increased 155.5% year-on-year to JPY 65 billion and net profit increased 540.5% year-on-year to JPY 40.2 billion. These high year-on-year increases were largely due to the recording of gains on the sale of the Dentsu Ginza Building concerning which circa JPY 30 billion were recorded in operating profit and circa JPY 22 billion in net profit as well as due to the gain on the sale of shares in CARTA HOLDINGS and the fair value remeasurement gain recorded on retained interest. I will now explain our performance by region. Our Japan business, which accounts for 44% of the group's net revenue performed well with organic growth of 4.7%. Of the 3 international regions, EMEA recorded organic growth, while the Americas and APAC showed organic declines. By market, the United Kingdom, Spain, Poland and India achieved organic growth, whilst U.S., Australia and China posted organic decline. Next, I will explain the performance of each region. Starting this quarter, we will be showing year-on-year net revenue growth at the center of the pages that explain regional results. And Japan posted organic growth of 4.7% in the first quarter. This marks 12 consecutive quarters of positive growth and 6 consecutive quarters of high growth at mid-single digit. In February, we took a conservative view of the first quarter, factoring in the rebound effect from major events held during the same period last year. However, Japan exceeded expectations by successfully winning clients fiscal year-end demand for advertisements in TV and internet media. Internet media posted double-digit turnover growth for the ninth consecutive quarter, and TV ads also showed strong mid-single-digit growth. Digital transformation also performed strongly, posting near double-digit growth, so as business transformation, which performed steadily as well. In January of this year, we changed the classification of CARTA HOLDINGS from a consolidated subsidiary to an equity method affiliate. This change caused net revenue to decline by 0.6% year-on-year. However, lower SG&A expenses enabled profits to increase, which translated to improved operating margin of 30.8%, an increase of 180 basis points year-on-year. Although the first quarter was stronger than expected, we will maintain our full year forecast of 2% to 3% organic growth, given the limited visibility we have into clients' business operations or the conditions and marketing demands, amongst other factors in light of the increased uncertainty in the macro environment. And starting this quarter, we'll also be showing organic growth rates by practice to provide more specific information about the performance of our international business. In the first quarter, the Americas region posted organic decline of 3%, which was in line with our expectations. By practice, Media remained stable with organic growth of 0.5%. While CXM remains slightly negative, its organic growth rate has continued to recover for 5 consecutive quarters. Meanwhile, Creative recorded a decline of 12.4% due to loss of projects last fiscal year and due to reduced client spending. Operating margin came to 16.1%, 160 basis points lower than the same period last year. However, this was in line with our expectations, benefiting from suppressed staff costs resulting from various initiatives, including our efforts to rebuild business foundation. And despite some impact which is expected from the second half of the fiscal year resulting from lesser business from certain large clients in the Media domain, we will retain our full year forecast of circa 2% organic decline as we have already factored in risks and opportunities to a certain extent. EMEA posted organic growth of 0.8% in the first quarter, in line with our expectations. The year-on-year increase of 15% in net revenue was mainly due to the weaker yen against the British pound and euro. By practice, Media posted organic growth of 5.3%. While this includes revenue from BMW and other clients that we won last year, there was also a large impact from earlier-than-expected recording of revenues in the United Kingdom. Despite performing well in Spain with double-digit growth, CXM posted a decline of 5.7%, continuing to face challenges in larger markets such as the United Kingdom and Switzerland. Creative also posted a decline of 5% due to experiencing revenue decreases mainly in Poland and Italy. Operating margin came to 3.1%. Underlying operating profit turned positive due to increased revenue and reduced SG&A expenses that benefited from our initiatives that include our efforts to rebuild business foundation. While our full year forecast of circa 1% organic growth is reiterated, we need to remain vigilant given the uncertainties in the macro environment. APAC region posted organic decline of 7.5% in the first quarter. Despite the challenging result, it was still in line with our expectations. By practice, Media recorded organic decline of 2.5%. This was because of the high growth rate of 5% recorded during the corresponding period last year, which was mainly due to the timing of revenue recognition in Australia. Overall, Media is performing steadily, particularly in China and Taiwan. Meanwhile, CXM recorded a decline of 24.2%, continuing to struggle in several markets, including Australia due to client losses and reduced spending. Creative posted 9.5% decline due to lower revenues, mainly in China and Southeast Asia. Due to suppressed SG&A expenses benefiting from initiatives that included efforts to rebuild business foundation, APAC was able to fully offset revenue decline to record underlying operating loss at the same level as the corresponding period last year, while our full year forecast of circa 1% organic growth is reiterated, we need to remain vigilant given the uncertainties in the macro environment. Next, I'd like to explain the changes in underlying operating profit from the corresponding period last fiscal year. Underlying operating profit for the first quarter increased by JPY 3.9 billion year-on-year from JPY 33.9 billion to JPY 37.8 billion. On a constant currency basis, the group's net revenue declined by JPY 3.9 billion. This was due to a decrease of JPY 800 million in the Japan business resulting from reclassification of CARTA HOLDINGS as an equity method affiliate and a decrease in revenue of JPY 3.6 billion on a constant currency basis in the 3 international regions. Staff costs were reduced by JPY 5.9 billion across the group, particularly in the 3 international regions. Operating expenses were also reduced by JPY 1.8 billion at the group level, with Japan contributing by JPY 1.1 billion and the 3 international regions by JPY 1.1 billion. In conclusion, we are reiterating our full year guidance announced in February. Organic growth and operating margin for the first quarter slightly exceeded our February expectations. While we anticipate some revenue decline from certain large clients starting from second half of the fiscal year, particularly in the Americas, our current full year guidance already includes risks and opportunities to a certain extent. However, macro environment is becoming increasingly uncertain due to reasons such as prolonged geopolitical risks and soaring resource and energy prices. This limits our visibility into clients' business conditions and marketing demands, amongst other factors. And since it is too difficult to reasonably estimate the impact of these factors on our full year performance at this point in time, we will keep our guidance unchanged. Expected nonpayment of dividend for fiscal 2026 also remains unchanged. With regards to the Middle East, direct impact is limited as the net revenue from the area accounts for less than 1% of the group's total on a consolidated basis and only about 3% of the EMEA region. Lastly, distributable profit, which stood at negative JPY 234.3 billion at the end of fiscal 2025 is expected to improve by JPY 70 billion to JPY 80 billion to circa negative JPY 160 billion by the end of this fiscal year. Net asset on a nonconsolidated basis is projected to turn positive at circa JPY 20 billion. We'll continue to make every effort towards resumption of dividends, such as by recovering our business performance and by selling nonoperating assets. Thank you for your attention.

[Interpreted] We will now begin the Q&A session. The first question is by Daiwa Securities, Abe-san.

[Interpreted] My name is Abe of Daiwa Securities. I have 2 questions. First of all is with regards to advertising demand. You said there is a rise in geopolitical risk. But by region, have you already begun to see impact to advertising demand? My second question, newly in EMEA and Australia, initiatives will be launched. What were the challenges that you have identified? Can you elaborate? And also cost reduction impact was cited. Have they already been factored in the numbers that you have already disclosed?

[Interpreted] Thank you, Abe-san. This is Sano speaking, and I will respond to your questions. First of all, regarding the Middle East, regarding the geopolitical risk, more specifically in the Middle East, there is certain impact. But in the overall business, the Middle East region in itself occupies a very small proportion. So it does not have any significant impact to our business. And as far as other regions, including Japan, is concerned, there is moderate rise of concern. And we are sensing some signs of risk rising. More specifically, oil prices are rising and manufacturers and companies in all sectors are psychologically being affected. So there is a mood of hesitancy. And in April, we began to sense such hesitation. It's not that significant, but on a worldwide basis, there seems to be such moves amongst advertisers. Coming to your second question regarding EMEA and ANZ. First of all, on EMEA, it covers a wide region from the Nordic countries to Africa. There used to be 7 clusters and regional headquarters in each of those clusters, but there was redundancy. And in order to improve efficiency, we wanted to reduce the overlap of EMEA headquarters to improve efficiency. Of course, we at the headquarters, want to shorten the distance to EMEA clients to accelerate decision-making. And also it has the effect of cost reduction. We've been speaking about cost reduction initiatives. And this initiative of streamlining EMEA headquarters have not been included. So this will be an additional initiative. And as far as Australia and New Zealand are concerned, the Media business is robust, but some of the CXM business, as I said, Salesforce-related business, the profitability wasn't high to begin with and the synergy with the Media business was not so significant, and that is why we decided on the divestiture. And for Australia and New Zealand, in last year's financial results, we talked about Australia and China turning to profitability from losses. And some of that had been factored in, but there would be additional cost reductions to be further factored into the future.

[Interpreted] Next question is from Harahata-san from Nomura Securities.

[Interpreted] This is Harahata from Nomura Securities. I have 2 questions. First question is when you talked about client centricity, agility and collaboration. And in the international business context, apart from the initiatives that you've announced, where are the challenges? And how -- what type of framework or schedule do you intend to undertake the restructuring? And the competitiveness of the international business, Big 3's competitiveness has become stronger. So based on what you have announced, are you going to continue to operate on an organic basis to strengthen your competitiveness rather than forming partnership?

[Interpreted] Thank you very much, Hara-san for your question. Yes. Your first question is regarding the agility, collaboration and so forth. But we're going to do this as a system. But there is also the activities or behavior of each and every employees. And so I am -- we are going to do what we can do as we have announced in February, until now, each of the region's CEO reported to the global COO who reported to me or the heads of each of the practices or the presidents and reported to the overall practices or the President, and reported to the overall practice President which reported to global CEO. So this was discontinued. Now all the reporting lines come directly to me. And so we wanted to create a flat organization as much as possible. And also reducing functions and decision-making related functions did require time, and so that will also be reduced. And what the organization can do will be done at the organizational level. But on top of that, we want to have everyone act with greater agility. So that is what we have been talking about. The other part, the collaboration. And a number of the items that we have explained today, and it does relate to your second question as well. But against those referred to as Big 3, we are slightly smaller in size, but we have been able to win in large global pitches. And the reason for that lies here. And so despite the fact we may be Media centered, but the technology of CXM or Creative, we do have sense in those areas. And we are able to make proposal in an integrated way as a group, which has led to us winning these presence, the pitches. So breaking the silos internally and we are going to create KPIs as an organization, but we want to make sure that this also becomes part of our behavioral principles. And so organization structure, KPI and the code of conduct. So all of these areas will be subject to this initiative. And how we're going to compete against the Big 3, your second question. And there was an article in the Campaign was yesterday or today about this. But if we compete only on scale, then we will end up losing. But when you look at the result, we are still winning in the global pitches. And so this is a proof. And clients to a certain extent, may find meaning in size. But more than that, the value that we provide is what they make decision on and the value they provide and the solutions that we provide. And when I actually talk with the clients, we often talk about teams. And when I ask why they chose us and they often say that they chose us as a team. And so the chemistry as a team with the client and if it is a 30 people, 30 people team, then the collaboration within that team, the ability of the team, the strength of the team becomes important. And I think that enables us to win. And so as I've explained earlier, we are going to be on the offense, accelerate the speed and understand the challenges of the customers before the client realizes that and which will lead to win. So in that regard, agility is required. And also partners, partners are quite broad-based terminology. So what you're assuming and not thinking of partners like funds. But in regards to potential technology partners, this would be area that we will be more proactive in considering, say, for example, Adobe or Salesforce. There are our clients, but there are also our technology partners that we are working with. And so enhancement of partnership with these entities is something that we intend to strengthen going forward.

[Interpreted] The next question is by Maeda-san of SMBC Nikko Securities.

[Interpreted] I have 2 questions. You mentioned partnership in the area of technology, platforms could become potential partners. And these partners are using AI on their platforms and are engaged in new initiatives. So outside of the conventional advertising business, AI could be used. Do you have capability in such area? Can we expect that to be a new growth domain? How will you be leveraging such AI capability? That's my first question.

[Interpreted] This is Sano speaking. So should I answer to your first question first then. And the short answer is yes. Lately, we published a press release. But more specifically, through our partnership with Microsoft, Microsoft M365 installed companies' data will be leveraged, and we will discover silos within companies and enable the companies to better use human resources. This is coined as HR for growth. So this is one example, which is probably easy to an example. But this is an example of AI not just being used for the advertising area alone, but for all other areas to help our clients. And this kind of initiative has begun in Japan, but we're trying to replicate such initiative in other markets outside of Japan.

[Interpreted] Now going on to my second question. APAC organic growth is the subject of my second question. Your full year guidance remains unchanged. But in terms of appearance, you seem to be behind. But you're confident that you will be able to catch up? Are there specific grounds on which you are maintaining the guidance? In comparison to other regions, it's small, so the variance may become large. So even if APAC is behind, the impact to the total business may be insignificant. So including the forecast and total business, do you have factors behind that make you confident to fulfill the guidance?

[Interpreted] This is Sano speaking. Let me respond. Just because the region is small, we're not attaching importance, no, that's not the case. I can't report to you now, but we have won a few competitive pitches. So to a certain extent, we have grounds to be confident to fulfill our target. Endo-san, do you have anything to add? No, he says. Thank you very much. Mr. Maeda, and thank you to all of the people who have asked questions. This will conclude the earnings call. Once again, I thank all of the participants who have joined us despite their busy schedule. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]