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[Interpreted] Thank you very much for participating in the Dentsu Group Inc. online 2020 Q3 earnings call. I am Chuya Aoki from Dentsu Group's IR office. This call is held on Zoom webinar. Please be aware that the call is being recorded. This call is simultaneously held in Japanese and English.
Next, let me explain the materials that we are using today. Today's presentations are provided on our website. They are titled 2020 Q3 Business Update and 2020 Q3 Financial Update. For participants via telephone line, please make sure that you have these documents in your hands.
Joining me today are from Tokyo, Toshihiro Yamamoto, CEO Dentsu Group.
[Interpreted] This is Yamamoto. Good afternoon.
[Interpreted] Hiroshi Igarashi, CEO, Dentsu Japan Network.
[Interpreted] This is Igarashi speaking. It is an honor.
[Interpreted] And Yushin Soga, CFO Dentsu Group.
[Interpreted] This is Soga speaking. Hello.
[Interpreted] From London, Nick Priday, CFO, Dentsu International.
Hello, everybody. This is Nick speaking.
[Interpreted] We have these 4 speakers today. Following this introduction, we will have the 2020 Q3 business update from Mr. Toshi Yamamoto. After that presentation, Yushin Soga will continue to explain the 2020 Q3 financial updates. After these presentations, we will invite you to ask questions. The call is scheduled to end at 19:00 JST, but may be extended by 15 minutes, if needed. Mr. Yamamoto, please go ahead.
Once again, this is Yamamoto speaking. Thank you very much for your kind participation today. I would like to start my presentation. Please turn to Page 1. I would first like to touch upon 4 things. First is that we are seeing gradual improvement. We are impacted by COVID-19. We continue to see a gradual improvement in performance with Q2 still seen as the trough for the group's financial performance this year. We have seen a gradual recovery across all business areas as clients' confidence steadily returns. A pickup in new pitch activity is notable in both Japan and internationally. Despite these encouraging signs, we remain cautious on our outlook given the uncertainty surrounding the impact from COVID-19 over the final few weeks of the year as restrictions have increased in many cities.
The second point regarding DX. While digital activities represent 52% of our group revenues, with 68% of international business and 33% in Japan, our fastest-growing area remains digital transformation. Digital transformation represents 26% of our group revenues, less cost of sales and is maintaining the positive growth year-to-date. Digital transformation encompasses activities such as commerce, brand experience and data-driven solutions provided by Merkle and Dentsu Digital, and we see a long runway of growth in these areas over the coming years. The third point is comprehensive review. We continue to make meaningful progress against the comprehensive review announced in August. The review is key to the future profitability and growth of our group. The review will accelerate our transformation, simplifying the business, structurally, lowering operating costs and maximizing long-term shareholder value. The review is wide reaching, covering not only business operations to drive growth and improve margins, but a full review of the balance sheet, with consideration whether we are the natural owner for many of our assets. And we are on track to deliver the results of the review in February 2021.
I will provide more detail on specific work streams later in the presentation. The fourth point, Wendy Clark. I'm also pleased to announce Wendy Clark has been with the group as Global CEO of Dentsu International and an Executive Officer of the Dentsu Group Inc. since September 1. And has already been making a tremendous and positive impact with our people, our clients and with Dentsu Group itself. Wendy is also a member of the Executive Committee of Dentsu Group level, further diversifying our senior leadership team.
Please turn to Page 2. Highlights in Q3. Starting from the left most part related to client business. As you look at our achievements through the quarter, there are a number of highlights. We have had a strong run of new business wins. Momentum is with the international business, having secured 10 major brand wins in 9 weeks. We are honored to be granted the responsibilities of new media accounts such as Kraft Heinz globally, excluding the U.S., McDonald's and Nestlé in China. And although not shown inside Nestlé in China and Galderma globally. While at the same time, we were able to deepen our relationships with existing clients such as Generali and Heineken. Responding to the emerging client needs for brand experience consultancies, our CXM and Creative lines of business have won many accounts. And I am proud to announce we have significantly expanded our relationship with American Express without a formal review through Dentsu McGary Bowen. In Japan, we announced a joint venture with Toyota, elevating our existing partnership to deliver true digital transformation beyond marketing. An outstanding trusted partnerships we are developing with our clients, demonstrate success as we integrate talent, process and technology. These wins stand as a testament to our strategy of leveraging the deep expertise across our group with our proven ability to unite them into bespoke solutions for clients across our global network.
Turning to the middle part of the slide, awards. In terms of creativity and capability of delivering solutions to our clients, we celebrated Denso Inc.'s Ulya Furukawa receiving the President's award of the DN award in September for his outstanding contribution to creativity. And Dentsu Group was selected as one of the most effective agency holding group at the EFI with Denso McGary Bowen and 360I selected us winning lead agencies. I am grateful for the fact that our creativity and solutions were highly valued.
Turning to the right part of the page, sustainability. Through our focus on sustainability, I am pleased to announce that Dentsu's international business achieved the ambitious goal it set itself in 2015 to procure 100% renewable electricity by the end of 2020. The international business has also committed to becoming a net 0 emissions business by 2030. The commitment includes a new science-based target to reduce absolute carbon emissions by 46% and offset all unavoidable emissions through certified greenhouse gas removal projects.
We also reconfirmed our listing in the FTSE for Good index by meeting their ESG standard. The group also has announced that it is joining the Valuable 500 which was launched last year at the World Economic Forum's Annual Meeting in Davos to commit to respecting employee diversity and developing solutions for people with disabilities.
Please turn to Slide 3. 2020 has been the opening of a new chapter for the Dentsu Group as we formed the foundation of our group as a holding company to support our 2 operating units. As we look to continue to simplify the business, we've rebranded down to Dentsu International in October, symbolizing the unity between the Japan business and the international business, bringing all people together under 1 unified brand and visual identity is an important and exciting step for us. Our clients will see 1 go-to-market offer. I have talked before about our Joint Technology Committee, our Global Creative Council. These efforts of collaboration continue. Integrated through 1 Dentsu, we are creating an environment in which this 66,000 people operating in more than 145 markets can form teams easily across geographical and organizational boundaries, bringing together unique talent and diverse perspectives that can spark innovation from anyone, anywhere. This radical collaboration empowers all individuals to create value and innovation and gives us the ability to form diverse and new solutions around client needs and sets us apart from our competitors, giving us a renewed source of differentiation. The diversity of our people has never been more important. And the creation of a workplace where each individual can thrive is central to the vision of 1 Dentsu. Dentsu Japan Network and Dentsu International are now united to pursue the same goal, integrated growth solutions.
Please turn to Slide 4. Our focus strategy of integrated growth solutions brings our diverse capabilities from across the group to deliver top line growth for our clients beyond marketing. Integrating our wide ranging services brings an incremental source of growth for our clients, allowing them to move with speed and agility, as their consumers demand and finally creates greater efficiency as we can solve bigger problems for our clients.
Please turn to Slide 5. I would like to discuss our client cooperations. Client needs have continued to evolve as society has undergone some drastic changes in the past 9 months. The level of complexity facing any business has never been greater. We continue to see the transfer of value between the disrupted and the disruptors. And transformation is the only way to survive.
Our recent CMO survey, which takes the views of over 1,300 global CMOs, the largest survey of its kind revealed the most successful CMO strategies require hyper empathy, hyper consolidation and hyper collaboration. In other words, many CMOs consider it important to understand the changes in consumer values post COVID-19, effectively collaborate with other functions inside their own organizations as well as collaborating with partners and suppliers outside the firm allowing for consolidation of all resources and teams, including sales, R&D, product development. [indiscernible] We support our client is with the recent introduction of Dentsu Commerce a cross agency initiative. The concept is simple, commerce is no longer a moment of monetization. Instead, it involves strategy, operations, branding and technology. Brands need to apply a commerce mindset in every area of their operations to develop consistent all-encompassing customer relationships. The removal of silos within a client organization is critical to success, allowing our clients to move with flexibility and agility across a number of touch points. In many ways, this mirrors the transformation we are seeing within our own organization. Removal of silos, allowing for deeper integration, the ability to deliver 1 integrated idea and executed across the whole of a client's organization is central to our focused strategy of integrated growth solutions.
Slide 6, please. About how to accelerate transformation at Dentsu. I would now like to touch upon our comprehensive review. Comprehensive review was announced in August. Its aim is to accelerate our transformation to be ahead of client needs and realize our focused strategy of integrated growth solutions. The review is wide reaching and is key to delivering the sustainable growth and profitability of the firm. There are 3 aims in this transformation. One, simplifying -- simplify the business, allowing for higher degree integration, which will drive our top line growth. At Dentsu International, we have already aligned our services within 3 LOBs, lines of business. We will now continue that simplification with the mergers of 160 agency brands down to 6. We have established a master service set, which describes services that we provide as a business. It provides clarity on the services we offer to our clients and simplifies the management of our business. In Dentsu Japan Network, we are reorganizing our group with 4 pillars of business which enables us -- which enable us to realize cost optimization and more effective collaboration.
Actually, number two, structurally lowering operating expenses. This will deliver margin improvement. Workflows include centralization of our capabilities globally as well as further expanding our use of offshoring. We are also undergoing a rationalization of office spaces and reviewing property ownership. Dentsu Inc. in Japan announced the life shift platform on which over 200 employees will work with Dentsu as freelancers, creating leaner organization with better cost efficiency.
Number three, enhancing the efficiency of our balance sheet. Reviewing the assets on the balance sheet to determine whether we are the natural owner for these assets with the aim of improving returns and maximizing long-term shareholder value. The group remains committed to delivering against the 3 aims of the comprehensive review. Meaningful progress has been made against these aims since we announced the review in August. And we remain on track to deliver the results of a review in February 2021 with our fiscal 2020 results.
The last slide of my presentation, this year has been challenging for many of us. And yet, this has further strengthened our resolve to accelerate our transformation to ensure future growth and profitability of Dentsu Group. I would like to extend my thanks and gratitude to all 66,000 Dentsu Group employees who have shown incredible dedication and commitment this year. In addition, I would like to thank our clients for their continued partnership. Thank you.
Thank you very much, Yamamoto. Next, Yushin, please go ahead.
Thank you, Yamamoto san. So I, Soga, would like to take you through the financial results for our third quarter.
Please turn to the next page. First are the key points. In the third quarter, we reported a gradual improvement in performance vis-à-vis second quarter as clients' confidence steadily returns. A pickup in new pitch activity was notable in both Japan and internationally with a number of new client wins and significant expansion of existing client relationships. Dentsu Group delivered organic revenue decline of minus 10.9% on a constant currency basis for the first 9 months of the year. However, our digital solutions business continues to grow, now reaching 25.8% of consolidated revenues. Group underlying operating margins expanded 120 basis points year-on-year, which is 12.6% due to strong cost actions across the group. The group is tracking ahead of the 7% targeted reduction in the planned 2020 cost base. As Yamamoto san discussed, meaningful progress continues to be made with the comprehensive review to accelerate our transition. The review is focused on returning the group to growth margin delivery and improving shareholder returns. As part of that review, we are conducting a full review of the assets on the balance sheet to determine whether we are the natural owner for these assets with the aim of improving returns.
Finally, our balance sheet remains strong, and we retain our long-term credit rating of AA minus by R&I.
Please turn to the next page. On the summary slide, I would like to first point out that Dentsu Group delivered a decline in revenue less cost of sales of minus 9.3% on a constant currency basis, minus 7.7% in Japan and minus 10.4% on a constant currency basis at the international business. The proportion of our revenue generation from digital activities remained over 50% at 52.7% at the 9-month stage and remains the fastest-growing area of the business. Group underlying operating profit declined less than 1% despite top line pressure due to continued cost actions taken across the group, which led to operating margins increasing 120 basis points year-on-year, which is 12.6%. Statutory operating income and net income will be explained in detail later.
Next page, please. This slide shows the factors contributing to the year-on-year change in revenue less cost of sales. Revenue less cost of sales in the first 9 months of 2019 was JPY 674.2 billion. There was a negative currency impact of JPY 10.7 billion due to further appreciation of yen. Acquisition positively contributed JPY 11.7 billion in the quarter. Finally, the organic performance saw a negative contribution of JPY 73.3 billion, reflecting the organic revenue decline of minus 10.9% for the group, leading to revenue of JPY 601.9 billion.
Next, moving to the underlying operating profit on the next page. Underlying operating profit decreased to JPY 75.8 billion, a decrease of only minus 0.3% year-on-year on a constant currency basis despite the top line pressures. This strong operating profit performance was due to continued cost action across the group, in particular, seen in the international business, such as the temporary removal of incentives and reduction in other operating expenses. At the group level, the reduction of the executive officers' compensation continues. I am pleased to say the group is tracking ahead of the targeted 7% cost reduction against the planned fiscal year 2020 consolidated cost base and we'd like to take this opportunity to thank all our employees for their continued commitment.
Next page, please. The group's operation in Japan delivered organic revenue decline of minus 7.9% in the first 9 months of fiscal year 2020. The digital solutions business maintained momentum throughout the first 9 months supporting client needs for digital transformation, ISID and Dentsu Digital significantly contributed to the group revenue less cost of sales, both posting double-digit organic growth in the first 9 months. Dentsu Inc. and Dentsu Tech, which deal is mainly mass advertisement, continue to be affected by COVID. These results demonstrate how we must accelerate our transformation to transition our revenues into fast growth areas. However, cost control could not cover the decline in the top line, resulting in an operating margin of 17.2%, minus 310 basis points year-on-year.
Next page, please. Next is the overseas international business. International business delivered organic revenue decline of minus 12.9% in the first 9 months of fiscal 2020. In the last 3 months, the organic performance has steadily increased with a strong run of new business wins across all 3 lines of businesses. Our largest clients continue to show the greatest resilience, and we see a gradual improvement in the investment clients are willing to make. The new business pipeline is growing in all areas as clients focus on brand strategy, experience and transaction. The Americas remain the region least affected by the pandemic. And APAC revenues remain the most affected, although encouraging signs are seen in China and Australia, 2 of our largest markets in the region. The international business has taken further cost actions where appropriate to limit the impact of margin delivery, reporting positive 46.1% year-on-year for underlying operating profit and plus 400 basis point margin improvement for 9 months. Dentsu International also benefited from the cost savings announced in December 2019, which are tracking ahead of previously announced GBP 45 million.
Next page, please. Moving to the reconciliation from the underlying operating profit to statutory profit. Underlying operating profit of JPY 75.8 billion was reduced by JPY 57.3 billion, resulting in statutory operating profit of JPY 18.5 billion. The major items in the one-off items amounted to JPY 25.1 billion, a major portion of which was related to the comprehensive review and accelerated transformation plan. JPY 22.5 billion is accounted for the additional early retirement program in Japan, New Horizon that was charged for in third quarter.
Next page, please. Looking at the statutory profit to net profit. Finance income increased year-on-year due to the revaluation gain on earn-out and put option liabilities caused by lower performance in some acquired companies. However, finance costs decreased year-on-year due to the revaluation of Merkle's put option liabilities This resulted in a JPY 30.1 billion increase of net financial income and an increase of net profit attributable to owners of the parent of JPY 10.2 billion for this year, an increase of JPY 4.9 billion from the previous year.
Next page, please. Moving to the cash flow. Cash flow from underlying operating profit of JPY 75.8 billion was offset by the seasonal change in working capital of JPY 135.7 billion, leading to net cash flows from operating activities showing negative JPY 79.7 billion. On a year-on-year basis, due to a smaller increase for working capital and a decrease of income tax paid, the net cash flows from operating activities increased by JPY 66.6 billion year-on-year.
Next page, please. A continuation on cash flow. Our cash flow statement continues on Slide 11. Cash flow from investment activity and financing activities were also on payment side in addition to negative JPY 79.7 billion from operating activities. Accordingly, net debt increased by JPY 160 billion.
Next page, please. This is the net debt. As shown on the previous slide, our net debt year-on-year increased by JPY 160 billion, while EBITDA in the last 12 months decreased by JPY 20 billion, resulting in a net debt-to-EBITDA average of 2.25x. The Dentsu Group remains well capitalized with a strong balance sheet JPY 545.1 billion of unused credit lines and JPY 288 billion of cash. The group credit rating is AA negative from Japan Rating and Investment Information, R&I.
Next page, please. My last slide is conclusions. 2020 has been a challenging year for our industry, our business and our people. In August, we announced our comprehensive review in our accelerated transformation plan to return the business to growth, deliver margin and improve returns.
As part of our transformation, we will incur some restructuring charges, which will be announced before year-end. Along with the associated cost savings. We will announce our full year 2020 underlying and statutory guidance before year-end when we have better visibility on the charges. We do, however, provide guidance for fiscal year 2020 for consolidated organic growth of minus 12% to minus 12.5% and consolidating operating margin of 13% to 13.5%. The comprehensive review includes a review of our non-trading assets to enhance shareholder value by considering whether we are the natural owner for these assets. While this review is ongoing given the impact of COVID-19 pandemic to our consolidated business performance for the fiscal year, year-end dividend is determined to be JPY 23.75 per share. Thank you. And I will hand back over to the NC.
Thank you, Mr. Soga. Now we would like to take the Q&A session.
The first questions are from Mr. Kinoshita from Merrill Lynch.
[Interpreted] I registered under Merrill Lynch, but the company name was changed to BofA Securities. I am Kinoshita. I'm allowed to ask 3 questions. I would like to ask 3 questions. Please answer each question before I move on to the next question. First question, I review the guidance for the fourth quarter, at the time of the second quarter in emergency fashion, cost was reduced. And this was an extraordinary measure. And there was a mention that there can be an increase in costs. But the third quarter cost level remained at the same level. Looking at the margin in guidance, I was not able to make detailed calculation. It appears as though the cost will increase in the third quarter, according to your guidance. Is that the correct understanding? And beyond next year, there will be business restructuring, and it will be difficult to forecast. But when next year starts, will cost level be back to the usual level as you start the next year? That is my first question. So my question is on cost.
[Interpreted] Mr. Soga speaking, Mr. Kinoshita, thank you for your question. I understand that you had question on costs. From the third quarter to the fourth quarter, as we explained before, from the second quarter towards the end of the year, we expected that there will be recoveries in the businesses. And as of now, we observing improvement in the businesses. As businesses improve on the cost side, along with the improvement in the business, there are trends of slight increase. We will continue to control costs. And as a message, we would like to convey that we are indeed able to control cost. And within the guidance that we have issued, we would like to deliver based on that guidance. Regarding the next year's cost. For international business, in particular, there were temporary cost reductions by cut in salary and a reduction in the management incentives. And that enabled the cost control from January next year. We expect to start the year at the former level of cost, but at the same time, there are plant business restructuring, which will be implemented starting next year. In view of that, well January 2021 be at the same level as January 2020, that will not be the case. Inclusive of that, when we have a better visibility of larger picture of business restructuring, we would like to provide more information in December. Thank you very much.
[Interpreted] Next question, I was not able to make backboard calculation based on full year guidance, but between negative 12% to negative 12.5% this year range for organic growth. Looking at the performance thus far and looking at the fourth quarter, it seems that fourth quarter may not be so different from the third quarter. It appears that you forecast fourth quarter to be similar to the third quarter or depending on the way calculation is made in comparison to the third quarter, organic growth, there may be some struggle in organic growth. Could you elaborate on how you forecast fourth quarter, if possible, could you give a regional breakdown?
[Interpreted] Thank you for your question. If you calculate, I think you will be able to understand the fourth quarter is almost in line with the third quarter. However, regarding the businesses in the fourth quarter, we have made conservative estimates. As a result, this is the level of performance or range of performance that we forecast at the moment. Globally, in the fourth quarter, there are great uncertainties. We also expect -- we have expectations for strong business, and we would like to do our utmost to achieve our expectations. Market breakdown regarding the Japan business. Within the group, Japan business faces a more difficult environment. As shown in IMF forecast in comparison to other markets globally, GDP growth for Japan may take time before it recovers to the former level in comparison to other countries. That is also reflected in our forecast. As for international business, CFO of DI, my counterpart, Nick will address that question. Nick, could you unmute?
Yes, I have. everybody. So in terms of the international business and the progression of revenue by quarter, obviously, quarter 2 was the -- as we guided as the floor, where we were at minus 20%. We have seen that sequential improvement that we guided towards in the third quarter, minus 14.6%. And we are cautious around the fourth quarter and the paid incentive guidance is appropriate. We're expecting the fourth quarter to be broadly in line or slightly down on the third quarter. And that's because we're cautious around the impact of the second wave of the COVID pandemic, which is impacting a number of our markets. And so that's really behind the guidance on revenue, which has been issued today. I would also say on cost just picking up on the previous question. That clearly, our margin performance is robust this year with margin is up 400 basis points on a year-to-date basis in the third quarter, we anticipate cost increasing in the fourth quarter. But we do expect to deliver meaningful margin expansion in 2020. And for full year guidance or long-term guidance for margin remains at 15%, which is our target for 2022. As Soga san said, we will be coming back on the restructuring, which we are undertaking as we seek to convert a number of the temporary actions which we've taken in 2020 into more permanent savings as we see to structurally lower our operating expenses as both Yamamoto san and Soga san said today. And that will give us more momentum on margin going into 2021 as well. Thank you.
[Interpreted] The third question as for the year-end dividend, it will be lower than last year. As for this year-end dividend, how did you calculate? What is the thinking behind this amount of JPY 23.75. Are you looking at cash flow, dividend payout ratio appears to be somewhat different. But what were the basis to arrive up this amount for year end dividend? That is my last question.
[Interpreted] Thank you for your question, JPY 23.75. In comparison to the initial amount for year-end dividend of JPY 47. This is a 50% reduction. The decision-making regarding this dividend amount took into consideration the drop in revenue due to global COVID pandemic. And another thing is, as I mentioned earlier, group revenue is supported by the temporary salary cut, including executive compensation. This is as a result of the temporary cost reduction. But for shareholders, we have advocated or committed to incremental dividend. And we have also looked at medium to long-term cash flow, as you pointed out. Viewing this comprehensive fashion in the end, in comparison to our initial expectation, we have decided on a 50% reduction to arrive at JPY 23.75 of year end dividend. Stable dividend policy and incremental dividend policy regarding this dividend policy itself, it is subject to review as a part of comprehensive review. Thank you. Thank you very much.
Thank you very much, Mr. Kinoshita, for your question. Next question is Mr. Julien Roch.
[Operator Instructions]
So my first question is on your cost reduction target for full year '20, minus 7%. How much is temporary? How much is permanent due to the new way of working post COVID-19? For instance, WPP told us that out of the 800 million cost savings, 25% was permanent. That's my first question. Then the second question is for international. Media performance, minus 16.1% organic for the first 9 months. Usually media is your better division. So could you give us some color on how much the performance would have been excluding your major account losses?
[Interpreted] Thank you very much, Julian san, for your question. So about the cost reduction. I, Soga would like to respond. So what is temporary and what is permanent? We do not have an accurate breakdown this time. As of today, around JPY 90 billion is the cost that has been reduced. Roughly speaking, in Japan, around JPY 30 billion and international JPY 60 billion. So to repeat myself, majority of this cost reduction is what I mentioned earlier, the employees salary reduction and incentive reduction or elimination. So our challenge going forward is after fiscal year 2021 and onward, as opposed to this temporary cost reduction, we are thinking of pursuing accelerated transformation plan by pursuing this ATP, we want to make this a lead-in to a permanent cost reduction. And the second question will be answered by my counterpart, CFO, Nick.
Thank you, Soga san. Thank you for the question, Julien. So just to follow-up on the cost question for the Dentsu international business. The majority of the savings I would say, more than 80% is currently temporary. But the comprehensive review is intended to make sure that the reduction in costs transitions from temporary to permit zones, including a real focus on rationalization of our property portfolio and the centralization of our business functions as well as other areas. And so that is a key part of the focus for us as we close out 2020, move into 2021. In terms of the breakdown by service line, and you asked about the media service line, in particular. I think it's worth saying in terms of the historic performance of our service lines, the CXM service line, which is dominated by our Merkle business has been a very strong performer, and that continues to be the case during 2020. In terms of the media business itself, I think it was most heavily impacted in the second quarter by scale backs and reductions in client spending. And really rather than sort of pull out the impact of losses, which haven't necessarily been particularly material in terms of the impact on our numbers, they've obviously had some impact. I think it's more the impact of the geographic profile we are less exposed to the U.S. where there's been more strength of performance across the peer group and also less expense in the health care sector. We've been -- we're more exposed to FMCG and technology and finance, which should be more resilient, but we're also more exposed to auto and luxury sectors, which have seen and some scale backs across some clients in those sectors. And so that's really behind, I think, the performance of the media business. But I think it's also worth reminding ourselves that the new business momentum that the company has is really quite encouraging. It just -- it doesn't have an impact on our Q3 revenues, unlikely to have an impact on our Q4 revenues, but does give us good momentum and confidence around recovery going into 2020 well. Thank you.
[Interpreted] Thank you, Julien, for your question. [Operator Instructions] Next, we have Mr. Ishihara from Daiwa Securities.
[Interpreted] Ishihara from Daiwa Securities. I'm calling you via telephone line. Can you hear me?
[Interpreted] Yes, we can hear you.
[Interpreted] I have 2 questions. If I may. The first question, this may be an overlap with the earlier question. But this is about cost reduction, in particular, I would like to ask about Japan business. Cost reduction in Japan is my question. After containment of COVID-19, do you plan to maintain the current level? Is it possible to maintain the current cost level? What cost reduction measures were implemented so far? And how will those change after the containment of COVID-19 infection next year and beyond? Will there be further reduction of cost level? Could you comment on the cost for international business? That is my first question. And the second question is about improvement of efficiency of balance sheet and efficiency in capital. Over the past 3 months, are there any measures that you've implemented? On this point, over the next few years, are you going to implement measures taking a few years? Or do you plan to take onetime large action to improve capital efficiency? What is your plan? And what is the size and timing of these measures?
[Interpreted] Thank you for your questions. This is Soga. I would like to respond to those questions. First, about the cost reduction for Japan business. Group overall, this is true for the group as a whole, first, for sale cost. In particular, in Japan, we are looking at overtime of our people. Overtime has been reduced. And performance linked bonus was also reduced, and that accounts for a large percentage. Other than those based on the performance, based on the top line, in order to support the top line in relation to the top line non-staff cost has also been reduced. And most part that was achieved as far as cost reduction is concerned up to the third quarter or more or less temporary in nature. And after 2021, as we discussed earlier, group as a whole will be engaged in accelerated transformation plan. 2021 will be the year to execute ATP, permanent cost reduction will be realized in 2021 and beyond. Regarding the next question, balance sheet review, whether there were any measures that we were able to take in the last 3 months? There were not a large-scale measure. But for example, sales of strategic shareholding. This is done on a regular basis. There have been some progress in these areas. And how much time we will spend in improving efficiency of balance sheet? It's not over span over a few years, but it's also not going to be a onetime effort. Within a relatively short period of time, comprehensive review of the balance sheet and improvement of efficiency open sheet are to be achieved. Thank you for your question.
[Interpreted] Next question is Adrien san de.
Yes, can you hear me okay?
Yes, I can hear you.
First of all, if I look at the performance of Dentsu International, it seems that Asia Pacific was the slowest region, which seems a bit counterintuitive, given this is the area where macroeconomic trends have improved the fastest. So can you provide a bit more details around what's going on there? And secondly, I completely appreciate this is a very recent trend. But have you seen or would you expect any changes in advertisers' behavior following the news of positive vaccine developments over the last few days? Or do advertisers expect tangible improvement in economic conditions before making marketing decisions?
Adrien, this is Nick speaking. So maybe I can take those questions. So in terms of the Dentsu International performance and you're calling out the Asia Pacific region. I think the context for performance in the Asia Pacific region is -- goes back to 2019. And the 2 largest markets in the region, China and Australia did suffer some client losses in 2019, which impacted our business, and those client losses have been out of the business during the first 2 quarters, in particular, and through the third quarter to some extent. Those 2 markets, China and Australia have now -- are now operating on the new leadership. And that new leadership is doing very well in what continues to be very difficult market circumstances across the economies in which they're operating, particularly in our sector. But I do think you see green shoots of recovery. So as Yamamoto san said earlier, we've won some large new accounts in China. McDonald's and Nestle, which are -- which is a great testament to the strength of our work in those markets. And also, we're seeing a green shoots of recovery in Australia, too. Those are the 2 largest markets in that region. And there are some legacy issues, which are cycling through the business in respect of those 2 markets. Expecting that performance to continue to improve as we close out the year and then going into 2021. I should also point out that India, which has been a very strong performer for us across the group over a number of years has obviously been quite heavily impacted by the COVID pandemic. And so there has been an impact on our business in that market, although, again, we're starting to now see that position gets somewhat better, which gives us more confidence, again, as we close out this year and go into next year. We do -- in terms of our guidance, we are cautious because of the ongoing potential impacts of COVID. But as you say, the news of the Pfizer vaccine has been taken positively, but we're still cautious in terms of our own business performance this year. We're very hopeful that this is a meaningful development in fight against the pandemic. And I think emotionally, you'd expect there to be potentially a positive impact from advertisers. But it's, as you say, it's too early to really call as to whether or not that will translate into action in Q4. We very much hope it does, but it's too early to say at this point in time. Thank you.
[Interpreted] This is Igarashi speaking. So I would like to add some more comments on the Japanese business. In Japan, regarding this vaccine development, we have a very strong hope, and we are paying attention to the situation of vaccine development. But that itself is not changing the circumstances, the advertisement circumstances just yet. But many clients in Japan were now suppressing their economic activities. But now towards the recovery or resumption of a more active action. We are starting to see some signs for them to start moving. It may take a little while but we're starting to see some green shoots of the recovery of the activity. I hope I answered your question.
[Interpreted] Next, we have Mr. Nagao from Nomura Securities.
[Interpreted] This is Nagao from Nomura Securities. I have one question about Japan business. Earlier, we got a san explained Japanese advertisers may be taking steps to resume their marketing activities. We believe that they will restart TV advertising first or will they use digital means? And will spend more on hybrid advertising. What do you think are the views of Japanese advertisers in terms of allocating their spending on media? Was there a change pre COVID and post COVID?
[Interpreted] This is Igarashi speaking. Thank you, Mr. Nagao for your question. If I were to answer your question, I think the latter is the case. Many of our clients themselves are undergoing or will have to undergo business transformation, and they have strong determination to go through with business transformation. And there is also a strong need for DX. As much as possible, business transformation and advertising and communications are to be pursued in an integrated fashion. I believe there will be increased drive to do so. But when we look at the traditional mass advertisement, whether it is efficient to increase awareness and what measurement can be used to measure its effectiveness as a means of advertisement. I believe that in that sense, our clients will be trying hybrid advertising, and we would like to make sure that we commit to that method of advertising.
[Interpreted] Next question is Mr. Eiji Maeda.
[Interpreted] SMBC Nikko Securities. My name is Maeda. I have one question. Toyota Motors, a joint venture with Toyota is my question. So business transformation concept -- I am paying attention that this could be like a touchstone for your digital transformation. And you already explained this but I do not fully understand the goal or what kind of business it could be. I don't have the full image. So if you could elaborate, I would appreciate it.
So this -- can I understand this as an example that shows your development going forward? And do you think of other similar collaborations with top leading companies in other industries? So if you could put all these in perspective.
Yes. Thank you very much, Mr. Maeda. Igarashi would like to respond.
[Interpreted] So our joint venture with Toyota, we think is the touchstone for our business transformation. So exactly as you put it. Some business Toyota Motors communication, not just to as communication, but also data that dealers had -- have can be utilized to offer more value to our customers, not just selling 1 car or 1 vehicle, not spending all the energy to sell 1 vehicle, but more focus on establishing long-term relationship with the customers, looking at customers as the asset and enhancing the asset. So we are trying to think how we can achieve that. So this is not just confined to advertisement or data utilization. The relationship with the dealers will be utilized and more, furthermore, not just in the world of vehicle, but also in the larger framework of mobility, and relevant stakeholders will all collaborate to take on this big challenge. For us, we will utilize data and also explore new ways of business with Toyota. So we want to establish new form of business. We will use and scrutinize all our resources internally and externally and realize this new type of business. So this business is now drawing attention from clients in other industries. And they are all trying to achieve business transformation. So we will use the trusting relationship with those clients to build new relationship with clients. We hope we can work with many clients going forward. I hope I answered your question.
[Interpreted] Are there anyone else with questions? [Operator Instructions] There are no further questions, we would like to end the question-and-answer session.
Now I would like to conclude the earnings announcement call of Dentsu Group for Q3 2020. Thank you very much for participating today. You may now disconnect from the Zoom or disconnect the telephone line, and we will close this webinar after a while. Thank you very much.
Thank you.