Dentsu Group Inc

TSE:4324

Q1-2025 Earnings Call

[Operator]

[Interpreted] Welcome to Dentsu FY 2025 First Quarter Earnings Call. Thank you for joining our call today. My name is Morishima from the Group IR office, and I will be your conference operator today. Today's presentation materials are available on our website. Joining me today are Global CEO of Dentsu, Hiroshi Igarashi; Global COO and Chairman and Acting CEO of Dentsu Americas, Giulio Malegori.

[Giulio Malegori, executive]

Good evening, and good morning, everybody. I'm Giulio Maligori.

[Operator]

[Interpreted] CEO of Dentsu Japan and Deputy Global COO of Dentsu, Takeshi Sano and Shigeki Endo, who has been appointed as our Global CFO in February. They will be responding to your questions after the presentation. Today's agenda will begin with business and strategic update from Hiroshi Igarashi, followed by financial update from Shigeki Endo. We will invite you to ask questions after the presentations. Mr. Igarashi, please go ahead.

[Hiroshi Igarashi, executive]

[Interpreted] Good evening, and thank you for joining our first quarter FY 2025 earnings call today. Our organic growth rate and operating margin for the first quarter of FY 2025 were broadly in line with our expectations. On a regional basis, the Japan business continued to grow and exceeded our expectations.

In contrast, the organic growth rate of all 3 regions in the international business was negative. The business environment remains challenging in the Americas and in several EMEA markets, primarily due to the slower-than-expected recovery of CXM. As we reflect on the outlook, the macro environment remains shrouded in uncertainty. There has been an increase in the risk exposure of our international business.

However, at this stage, we have not seen a significant reduction in our clients' appetite to invest in marketing despite the prevailing concerns about the global economic outlook, including policy changes in the United States. We reiterate our guidance announced in February. We will continue to closely monitor the impact on our business and we will promptly disclose any significant effects on our business and results.

Today, I will also provide an update on the progress of our midterm management plan. We are promoting various initiatives to maximize business opportunities, mainly in Japan and the United States, where we already have substantial sales volumes and diverse business assets.

Let me highlight our achievements in the first quarter. Regarding client wins on a global level, we have successfully expanded our media contracts with Heineken, building on our trusted relationship from 2016 as a global media agency.

This expansion is to cover more than 100 markets, demonstrating our continued commitment to excellence and our partnerships. In other regions, we welcomed our new media clients, Agoda in Japan as well as Wolt Enterprise in EMEA. In terms of industry recognition, we are proud to again receive Network of the Year at advest and numerous prestigious awards, including a Grand Prix at Spikes Asia.

Here is our progress on the midterm management plan. Firstly, our 2 initiatives to improve profitability. As part of our progress to rebuild the business foundation, we are integrating the headquarters functions in Tokyo and London and redefining the role of a regional headquarters as well as implementing cost controls in markets. By rebuilding the business foundation, we aim to achieve an operating margin of 16% to 17% in FY 2027, the final year of our midterm management plan.

We have identified initiatives that will bring approximately 90% of the expected JPY 50 billion cost reduction. Going forward, we will advance these initiatives in conjunction with streamlining operations supported by AI and systems investment to achieve sustainable cost reductions.

Next, I would like to address the topic of reevaluating underperforming businesses. As I have explained in February, we have identified underperforming markets and entities. Underperforming markets are those where cumulative capital exceeds JPY 10 billion, yet operating at a loss for 2 or more consecutive years.

Underperforming entities are defined as those acquired in recent years that have not met initial plans. In these markets and entities, our first priority is to revitalize our business. We have made plans and completed feasibility assessment. To this end, our dedicated global, regional and local teams are beginning to recover underperforming markets and entities.

However, should it become clear that achieving the expected results is an unattainable goal, we will take all necessary and appropriate actions. This may include reorganization, withdrawal or divestment of each individual business. I would like to provide details of these plans quarterly in the future. Our goal is for all 4 regions to contribute to shareholder value in FY 2027, the final year of the midterm management plan.

Last but not least, our internal investment aimed at recovering our competitiveness. In the first quarter, we focused on AI, data and technology and talent. The strategy rests on 2 pillars: global investment, which leverages scale benefit from a global perspective and market investment, which is flexible and tailored to each market. We will continue to flexibly optimize and promote this investment strategy.

Next, I would like to talk about the progress in AI and data and technology. Our strategy is to rapidly combine the latest technologies developed by our alliance partners with our data assets, consisting of unique consumer data, marketing expertise and knowledge and utilize it for marketing.

Rather than simply using AI as a tool for automation and efficiency, we are promoting the unique use of AI by inputting our strengths such as human thinking, know-how and various data into AI. This enables us to quickly develop our unique products and provide clients with our proprietary AI solutions.

This month, we are planning to rebrand our end-to-end marketing integration platform, Dentsu.Connect, available in around 120 markets, including the United States, the United Kingdom and Spain. This platform combines our proprietary consumer data with client and third-party data to create integrated marketing plans from consumer insights to effective targeting and media plan ROI improvement.

By leveraging rich data, we will achieve precise insights and high predictive accuracy of potential customer behavior, leading to improved performance. In Japan, we significantly revamped our AIQQQ Studio solution service, which develops and verifies prototypes of business and communication concepts through collaboration between our proprietary AI and human experts.

Since its launch last year, we have already achieved several successes, including sessions using Google's generative AI Gemini. We are now able to offer high-quality simulations and comprehensive workshops in conjunction with our proprietary database.

In addition, during the first quarter, our efforts to develop GenStudio Dentsu Plus, a content supply chain tool incorporating Dentsu's proprietary models and data were recognized with the Partner Award. In addition to product development, we work with partners such as AWS and Meta on talent development. We intend to invest actively in talent and enhance the environment in this area.

Now, I will hand over to our Global CFO, Shigeki Endo, to update our financial results.

[Shigeki Endo, executive]

[Interpreted] Thank you, Igarashi-san. Hello, everyone. This is Shigeki Endo. Before I take you through the financial update, I would like to briefly say that it's an honor to take on the role of Global CFO. I look forward to meeting many of our shareholders and analysts over the coming weeks and months. Now let me provide an overview of our consolidated financial results for the first quarter of fiscal year 2025. I will start with our key metrics.

Organic growth in the first quarter was plus 0.2%, broadly in line with our expectations as of February. While the strong Japanese business exceeded expectations, the Americas and EMEA performed slightly below expectations. Moreover, all of our international regions saw negative growth with a slower recovery in CXM, particularly in the Americas and some EMEA markets. Consolidated group net revenue increased 0.3% year-on-year to JPY 287.3 billion, while underlying operating profit increased 13.7% year-on-year to JPY 33.9 billion, resulting in increased net revenue and underlying operating profit.

The operating margin was 11.8%, up 140 basis points year-on-year and broadly in line with our expectations. Our underlying basic EPS increased 6.5% year-on-year to JPY 63.71. On a statutory basis, operating profit increased 75.5% year-on-year to JPY 25.4 billion, and net profit increased 12.9% year-on-year to JPY 6.3 billion. The higher year-on-year increase in statutory profits was also due to the recording of an impairment loss on intangible assets in APAC in the previous corresponding period.

Next, let's move on to the regional slide. In the first quarter, Japan performed well with high organic growth. However, all of our 3 regions in international markets recorded negative organic growth. More specifically, the United States, the United Kingdom and China reported negative organic growth, while Germany, Switzerland, Taiwan, India and Thailand saw positive organic growth.

Japan, the largest region accounting for around 45% of the group's net revenue saw organic growth of plus 5.5% in the first quarter. This is the eighth consecutive quarter of positive growth and the second consecutive quarter of growth of 5% or more.

Net revenue reached a new record high for the first quarter, and the underlying operating profit was the second highest on record. This strong performance has been supported not only by the expansion of business with existing clients, but also by the start of revenue recognition from pitches won in FY 2024.

Internet Media achieved double-digit growth in turnover for the second consecutive year in the first quarter, driving growth in our marketing business. In addition, the business transformation domain continued to achieve double-digit growth, while the sports and entertainment domain also saw steady growth.

In Japan, staff costs saw some increase as we enforced talent expansion, but the increase in net revenue more than offset this, resulting in a high operating margin level of 29%. Next, in the Americas, which accounts for around 27% of the group's net revenue, the organic growth rate in the first quarter was negative 5.1%, slightly below expectations.

CXM, in particular, continued to face challenging business conditions, resulting in a double-digit decline. The recovery is low due to a continuation of the same trends from the previous year, including decline in budgets by existing clients, new projects not being able to offset the reductions and negative impact of sales cycle delays due to persistently high interest rates.

Meanwhile, media remained relatively stable with slightly negative organic growth. On the other hand, underlying operating profit showed an increase year-on-year. A proactive control in SG&A expenses, primarily staff costs offset the decrease in net revenue. As a result, the operating margin improved 150 basis points year-on-year to 17.7%.

EMEA's organic growth rate in the first quarter was negative 0.9%, slightly below expectations. As in the Americas, the challenging CXM business conditions impacted performance. Media remained relatively stable with low single-digit growth. Specifically, the major market, the United Kingdom, saw a double-digit decline and some North European markets such as Netherlands and Denmark also saw negative growth.

The ratio of CXM is relatively high in these markets. So the impact on the market performance is high. On the other hand, Spain saw a slight decline in growth. However, this was due to the high comparable of double-digit organic growth in the same period last year, and the business itself was steady. Efforts were also made to control staff cost in EMEA, but underlying operating loss increased due to increases in other operating expenses. APAC remained a tough situation with a negative organic growth rate, but it was slightly above expectations.

While CXM remains severe, Media remains strong with mid-single-digit positive growth. By market, Taiwan and India, the third and fourth largest markets in APAC, performed particularly well. Taiwan, in particular, saw double-digit growth in all practices.

In Australia, CXM continues to face challenges, but Media saw growth and the market as a whole remained generally at the same level year-on-year. Meanwhile, China continues to experience a double-digit decline. Underlying operating loss was roughly at the same level year-on-year. Controls on SG&A expenses, primarily staff costs, covered most of the decrease in the net revenue.

Now I will move on to the changes in group's underlying operating profit from the previous corresponding period. Underlying operating profit for the first quarter increased from JPY 29.8 billion in the same period last year to JPY 33.9 billion. This was primarily due to a decrease in staff cost in our international business.

Let me explain in detail. Net revenue was roughly at the same level year-on-year. The increase in net revenue in Japan was offset by the decrease in net revenue in our 3 international regions. So there was almost no impact on underlying operating profit on the group consolidated basis.

On the other hand, staff cost decreased JPY 3.7 billion. Staff cost increased somewhat in Japan due to efforts to expand our talents, but this was more than offset by the effect of reducing staff costs in our international business. Also, other operating expenses also decreased by JPY 500 million due to cost controls implemented mainly in our international business.

In conclusion, the organic growth rate and operating margin in the first quarter were in line with our expectations. However, CXM in the international business remains challenging with increased risks in Americas and EMEA. Additionally, hence, we have not yet observed a significant decline in clients' marketing investment appetite in relation to the United States tariff policies, we recognize that this has increased uncertainty in the global economy.

However, as it is currently difficult to quantify the impact on our performance reasonably, our full year guidance, as we announced in February, is reiterated. We will continue to implement the initiatives through our midterm management plan, and I will make every effort to drive reevaluating underperforming businesses and rebuilding the business foundation. Thank you for your attention. I will now hand back to the moderator.

[Operator]

[Interpreted] We would like to begin the Q&A session at this time.

The first question is from Abe-san from Daiwa Securities.

[Masayuki Abe, analyst]

[Interpreted] My name is Abe from Daiwa Securities. I would like to ask two questions. Question number one, about the outlook of organic growth rate. I think your original thinking was to have a positive organic growth rate in overseas. It seems that you're having difficulty. And do you still think that you will be able to hit the full year guidance for overseas? Or because Japan is performing very strongly, do you think that you will be able to make up for the negative growth with Japan's growth?

And SG&A about structural reform expense as well as strategic cost, how much is being spent in the first quarter? And what timing will this cost be expended? So two questions, please.

[Hiroshi Igarashi, executive]

[Interpreted] Igarashi speaking, Abe-san, thank you very much for your questions. Two questions. First, about the organic growth outlook. In overseas, for the full year, our outlook is to have a positive growth. Will it be the case? Igarashi will be answering that question. And your second question regarding structural reform cost and strategic expenses, at what timing will they be spent? What is the outlook? That question will be answered by Endo-san.

First about organic growth outlook. In the earnings that we announced this time, as you pointed out, we did have a slightly positive growth supported by Japan's strong performance despite having difficulty overseas. So Japan's growth did offset the difficulty overseas. As you know, areas such as CXM continue to face challenges. And on a full year basis, how is that factored in? That will be a key question as to whether or not we're going to have a positive growth rate overseas on a full year basis or not. We have decided not to change our guidance. So through our efforts, we would like to achieve a positive organic growth rate overseas as well.

Especially with respect to CXM, with a very fine granular level, we are verifying how the business is performing, inclusive of the pipeline. Compared to February, I think the level of examination that we are performing is more detailed. Although there are uncertainties remaining, I think the pipeline is being realistic. And ultimately, we would like to have a positive organic growth rate for overseas at the end of the year. That is the outlook.

For the second question, I would like to turn to Endo-san for an answer.

[Shigeki Endo, executive]

[Interpreted] Endo speaking, thank you. About the investments. In the midterm management plan, we explained about this, FY 2027 -- for '27 operating margin of 16% to 17% to be achieved by that year. One of the endeavors is to rebuild our management foundation and another is revaluation of underperforming businesses. The target this year is to spend a maximum of JPY 50 billion to achieve a cost reduction of JPY 35 billion to JPY 50 billion. So already, we are conducting such initiatives, and investment has already begun in the first quarter already. And overall, second quarter until the year-end, JPY 50 billion of investment will be made. And FY 2026 with the target year of FY 2027, we would like to achieve a cost reduction of JPY 35 billion to JPY 50 billion. So we are already pursuing that. Efforts are underway already, and on an ongoing basis, investment will continue to rise.

[Operator]

[Interpreted] Next question is from Edison Group, Ms. Fiona Orford-Williams.

[Fiona Orford-Williams, analyst]

It's Fiona Orford-Williams from Edison Investment Management. My two questions. First of all, in terms of CXM, presumably, at some stage, we will start lapping the downturn from last year. Is that easing in comparatives going to happen already in Q2? Or does it -- is it really going to come into effect in the second half? And also, just out of interest, whether the nature of the projects that you're doing or bidding for in the CXM is changing at all, maybe going for different type of scale?

And my second question is about new business. Maybe you could just run through in a little bit more detail some of the new business wins that have been in the first quarter. And just give us an idea on the pipelines, both in Japan and in other territories, that would be helpful.

[Hiroshi Igarashi, executive]

[Interpreted] Thank you very much, Fiona-san. To your first question, CXM, at what stage we will be bottoming out. You would like to know our perspective. And also for CXM, you would like to know the scale and types, whether there has been any changes. First, I would like to respond and Giulio will be providing supplementary comments, if there is any. In terms of the new businesses, Igarashi, I will answer.

In terms of CXM, from February, we have enhanced the management structure. We now have the new management structure. And we have analyzed and scrutinized the business, and we have been accelerating those initiatives, inclusive of the situation in the pipeline. We have been able to improve the accuracy in our deliberation on the projects.

In the first quarter, we had seen very severe situation, but we are working on the management of the pipeline, and we are looking at the situation of the clients of how they are working on the CXM, and we are analyzing this thoroughly. And we now have identified the challenges that they are facing, and we now have clear idea about where we need to tackle. So we have made various progress in this area.

On the other hand, we believe that the bottoming-out will happen sometime in the second half of this year. The accuracy of our analysis is improving, but we still need more time for improvement in this area.

In terms of the scale and the types of the projects that we are working on, if there is any supplementary comment Giulio-san would like to make, I would like to solicit your comments.

[Giulio Malegori, executive]

Thank you, Igarashi-san, and thank you to Fiona for the question.

I would just reiterate the new leadership in place. We went to a new Technology Officer, a new Global Head of CRM, a few senior sellers. We have a new Head of Commerce and Experience, and they are already starting making an impact. And therefore, we are expecting that to materialize in the second part of the year. The project and the scope remains focused on the three main capability areas at Merkle, so CX and commerce, data analytics and CRM and loyalty with a particular focus on content supply chain, commerce and on the analytics side.

In terms of the pipeline, clearly remains the uncertainty of the overall scenario, but we are anticipating a growing pipeline. And I think I can comment that in March, actually, we got the best pipeline generation since 2003 -- 2023, sorry. So is this meaning that we are -- is a trend and I know, that these are positive signs. So I hope this gives further flavor to your question and to our answer.

[Hiroshi Igarashi, executive]

[Interpreted] Next is related to new businesses. With regards to Media in International businesses, net win is growing steadily. On a quarterly basis, we have seen accumulation of net wins. And in the first quarter, compared to the fourth quarter of last fiscal year, we are seeing a slight improvement in terms of the net win. Pipeline is increasing as well. 85% of the pipeline is offensive.

On the other hand, Creative area has seen decrease in new business. We will be working on the enhancement of the pipeline in this area. With regards to CXM, it's as Giulio has already mentioned. It's very hard to compare because of the differences in the categorization, but we are almost on par with last year to slightly positive.

With regards to the Japan business, with regards to the win rate, it is going very steadily. In the first quarter, the win rate was quite high, and we are maintaining that momentum, and the win rate of the pitch will probably lead to the more wins for new businesses.

[Operator]

[Interpreted] Next, from SMBC Nikko Securities, Maeda-san, please.

[Eiji Maeda, analyst]

[Interpreted] My name is Maeda from SMBC Nikko Securities. There was mention about the Japanese business. Overseas are seeing a lot of uncertainties of late. Japan's ad demand, demand for advertisement, continues to be strong. So uncertainties overseas, can that be overcome by Japan's strong business? Is it that strong? And so what is the outlook of Japan business? If you could focus on that? That's my first question.

My second question is as follows with respect to cost. In Q1, staff costs was reduced, especially overseas, and that has contributed to the bottom line. And however, there will be an offset with the strategic cost expenditure. As you pursue business transformation, the effect of cost reduction, how will it look like Q2 and onward, especially with increased staff costs? So overseas, top line is weak or -- and you have reduced the staff cost, but is that something structural? Can it be sustained?

[Hiroshi Igarashi, executive]

[Interpreted] Maeda-san, thank you very much for your questions. Your first question, demand is strong in Japan. You said second quarter and onwards, will the situation continue to be strong, what is our outlook? That's what you would like to know. Well, regarding that, I would like to turn to Sano-san, responsible for Japan business to answer.

Regarding the cost, second quarter and onwards, with strategic investment, there will be some offset. And specifically, what is going to be the effect of cost reduction? What is our view? And I would like to turn to Endo-san for an answer to that question.

[佐野 傑, executive]

[Interpreted] Maeda-san, thank you very much for your questions. This is Sano speaking. Thank you very much for your expectations and hopes for our business. But having said so, there are tariffs and other issues that are contributing to increased uncertainties on the part of the clients. We cannot say anything definitive at this moment. However, as Igarashi-san earlier said, we continue to sustain a very high level of win rates and the pitch wins that we acquired last year plus the wins are increasing. And this year, we have Osaka Expo as well as World [indiscernible] meet, so we look forward to sustaining a strong growth.

[Shigeki Endo, executive]

[Interpreted] Thank you, this is Endo speaking. With respect to the cost, the business transformation and structural reform to rebuild management foundation and to reevaluate underperforming portfolio and businesses. This is not just a simple cost reduction initiative. We are evaluating our each and every business within the group as well as each organization. So the ones that need to be discarded, it need to be discarded. And the ones that are to be sustained, how can we make it leaner? We are trying to review that, evaluate that, individually. To create an efficient organization, we're trying to rebuild our organization so that it can become more efficient. So inclusive of the revaluation of the organization, when will the effect start to show? I think it will be in the second half of this fiscal year.

The cost of JPY 50 billion, we already have planned 90% of that, and we will continue to implement the plan. The operating margin of 16% to 17% is to be achieved, and that's the basis. So the balance between revenue and cost will have to be watched. So we will look at the profitability to achieve the right balance. That is what we're trying to pursue. Therefore, toward December, and part of it will be into FY '26, but mainly in the second half of this fiscal year. Once our reevaluation is done, the effect of cost investment will start to show gradually. So that's how we're going to proceed.

[Operator]

[Interpreted] The next question is from BofA Securities, Nagao-san.

[Yoshitaka Nagao, analyst]

[Interpreted] My name is Nagao from BofA Securities. I would like to ask about the overall first quarter profitability. In the full year, you are expecting organic growth of about 1%. But overall, 0.2% increase. And the underlying OP is negative 17%, JPY 146 billion, and this time, you are expecting 14% increase. So this increase is coming from the cost reduction like the reduction in the labor cost, or is it the strategic investment, which is working well, or you had suppressed the strategic investment that pushed up the profitability? So that's my first question.

My second question. Others have asked about this. Profitability of the Japan business. If the sales is higher, the profitability will be higher. So the Japan business is growing to 29%. Is it temporary, the large-scale project or the profitability coming from the large-scale projects? Or have you gone into the structural reform phase where you are able to have better profitability? So could you elaborate?

[Hiroshi Igarashi, executive]

[Interpreted] Thank you, Nagao-san, for your question. To your first question about the profitability in the first quarter, especially the contents of the cost, did the labor cost reduction contribute to this? Or did the strategic investment had something of a role to play in that? Endo-san will respond to that question.

Your second question was about the high profitability of the Japan business of 29%, and you would like to know why it was, the process for the improvement in the profitability, for example. So that will be responded to by Sano-san.

[Shigeki Endo, executive]

[Interpreted] This is Endo. I would like to respond to your question. In terms of the net revenue from January to March, comparing it to last fiscal year, so there are some differences between [Foreign Language] and the other -- the numbers, whether it excludes Russia or not. And the final operating profit was plus 75.5%.

The cost in between, so including the labor cost and SG&A, that impacted significantly and also the impairment cost. Last year, from January to March in APAC. There were impairment losses, but this year, we did not have that kind of impairment losses, and that contributed to the increase by 75.5% to the operating profit. That's all from me.

[Hiroshi Igarashi, executive]

[Interpreted] This is Igarashi. With regards to the cost reduction, starting from the beginning of the year, under the guidance of Giulio in the International business, there has been significant suppression of the cost. Because of that, there has been reduction in the cost, and that has been accelerated.

With regards to the strategic investment that you referred to in your question, as I have said at the beginning of my presentation, global investments, and market-by-market strategic investment, we are considering those two separately. We are scrutinizing and analyzing each investment and inclusive of the labor cost and the data technology area, there are a lot of considerations made. And in the first quarter, we started out slowly.

Sano-san will answer the second question.

[佐野 傑, executive]

[Interpreted] This is Sano. Nagao-san. Thank you very much for your question. You asked whether it was temporary. In the past several years, in Japan, there has been structural reforms going on. We had been making efforts to improve the operating margin through improvement in the efficiency. So that's one thing that we have been working on.

The month of March has the biggest number of marketing cost and the first quarter tends to have higher operating margin. And so it's not that it will continue for the full year.

As I have mentioned in the guidance, this year compared to last year, we will be investing more to the future, including AI. And because of this, we are expecting the operating margin to be lower than last year. So in the second, third and fourth quarters, there will be some adjustments. That will be all from me.

[Operator]

[Interpreted] Next, from Nomura Securities, Harahata-san.

[Ryohei Harahata, analyst]

[Interpreted] My name is Harahata from Nomura Securities. I would like to ask two questions as well. It's more about the medium to long term rather than the short term. First is about the competitiveness of overseas market. So you are reevaluating and withdraw from unperforming businesses. After that, you may have difficulty reentering. So how are you going to grow back again to put yourself on a growth track once again, given that your size is smaller.

And this is a question for Endo-san. As a CFO, what are the challenges that you see in the group? And in what priority are you going to tackle the challenges for the group? What is your thinking? Two questions.

[Hiroshi Igarashi, executive]

[Interpreted] Harahata-san, thank you very much for your questions. From a medium- to long-term perspective, two questions you asked. First, about the unperforming businesses overseas as we reevaluate them going forward in terms of competition with respect to the growth strategy, what is our view? Can we grow? It seems that you are somewhat concerned about that. I would like to answer first and then turn to Giulio for some additional answers.

And the second question will be answered by our CFO, Endo, our group's challenges. So Endo-san will be answering the second question.

First, regarding overseas businesses, the International business. As we have been saying, we have two major initiatives, reevaluation of unperforming businesses and rebuilding management foundation mainly to reduce and compress cost and loss-making businesses to be reviewed and reevaluated. So we're going to rebuild the foundation and create a basis for growth in the future. That is the initiative ongoing. And process automation is part of that effort. The way in which business is conducted and operated will be enhanced solidly. That is included as part of the effort. Our talent, human resources need to be focused on areas of growth in the future as well as businesses that increase value, acquiring talents who have expertise, and they need to focus on such areas. And data and technology, as we rebuild our foundation, we need to capture that.

It is true that CXM is facing challenges, but the accuracy of our analysis, understanding of the situation, what to attack, how to approach, we are considering that. While doing so, Media, which is relatively performing very well in all the markets, we would like to enhance the Media business as well at the same time.

Through these initiatives, we're trying to understand the marketing-related issues of our clients because we have this challenge of acquiring new clients. What kind of offers we make to our clients, we have to think because that is going to be key to our growth. So we are accelerating such efforts. We're examining that vigorously.

The U.S. market is a very critical market for us. So in the U.S. market, what we're doing there is going to be the kind of vision that we should -- the rest of the world should aspire to achieve. So Giulio, may I turn to Giulio for additional comments on that.

[Giulio Malegori, executive]

Thank you very much, Iga-san, and thank you, Harahata-san, for your question on the medium- to long-term development. Actually, is a very important question because it offers us the chance to really comment on what we are doing, balancing between the short-term immediate objective and the long-term one.

Overall, we are working intensively in accelerating our product offering in some specific areas to reflect the strategy of having more media centricity in our delivery of business outcome to our clients via the integrated growth solution approach.

And in doing that, we already commented, for instance, when we look at the media, we are really focusing on accelerating the capabilities that are crucial at the intersection with data in the audience science area and the analytics. We are also accelerating our development in the retail media and in the next-generation performance. So all these activities are in place, and it's related to the previous question about balancing between a good discipline on the cost management on one side, but keep on investing on a strategic level to guarantee us the right level of growth in mid- to long term.

When we look at -- and we already commented on Dentsu Connect. When we look at Creative, we are recognized by external stakeholder as having the most evolved content supply chain offer, and that will be a super important capability in the near future. So altogether with the lens of the unique client centricity that we have as a legacy of Dentsu and our heritage, we are confident we will be able to develop the growth that we are expecting from the mid- and long term.

Last but not least, we are carefully rebalancing the approach between global and local. And within that, especially in media, the U.S. will be central for the development of the global business. So I hope this answer your question, Harahata-san. Thank you.

[Shigeki Endo, executive]

[Interpreted] This is Endo speaking. I joined Dentsu Group July last year, and I have become CFO in February. So as I analyzed the Dentsu Group, one of the challenges that I see is to be conscious of the KPIs in our management. Our balance sheet, profit and loss -- we have to manage our business, conscious of our balance sheet as well as the profit and loss statement. I think there's more opportunity that can be had in that regard.

At this moment, if we look at the sluggish performance overseas, for one thing, we have engaged in very aggressive M&A deals. Unfortunately, they have not gone very well. Of course, as we grow, M&A itself is important. But post M&A, post-acquisition, how can we create synergies? What the target company acquired alone cannot do just because the target company is now part of our group. How can we increase our business 2x, 3x more? So post-merger integration, that unfortunately has not worked very well overseas.

So on that point, we have a new M&A guideline that we adhere to. And through that, how can we strengthen and grow acquired business? As a member of our M&A committee, we will be pursuing that initiative to make improvements. And other than that, underperforming businesses, any business that has been acquired through M&A that is unfortunately running up losses or underperforming businesses that we have identified, by applying KPIs, we will be considering them as to what to do.

And other than that, we have two head offices -- two headquarters, and inevitably, silos developed. So we want to make the organization leaner to reduce cost by integrating the functions. And ultimately, we would like to expand profitability through that.

And how can the profit gain be reinvented? In other words, capital allocation, that is something that we need to consider very solidly. Of course, reinvestment is one thing and return to shareholders another. And on the supply side, communication to financial institutions, these all need to be continued and enhanced. That's our thinking. That would be all.

[Operator]

[Interpreted] So there is one last question from Mizuho Securities, Kishimoto-san.

[Akitomo Kishimoto, analyst]

[Interpreted] My name is Kishimoto from Mizuho Securities. I have one question. I would like to ask you about how you view the balance sheet. So JPY 100 billion, the bond issuance is expected. And I would like to know whether you are maintaining the interest-bearing debt? Or are you considering increasing or decreasing the interest-bearing debt? And it seems that you are shifting to the domestic debt and the international ratio seems to be decreasing, but I was wondering if it is right.

[Hiroshi Igarashi, executive]

[Interpreted] Kishimoto-san, thank you very much for your question. You are asking about how we view the balance sheet. And you have asked about interest-bearing debt. and you would like to know how we would work on this going forward. And also the balance of the lending seems to be shifting from overseas to the domestic market, but you would like to know how our directionality would be. Endo-san will respond.

[Shigeki Endo, executive]

[Interpreted] This is Endo. To your question about interest-bearing debt. Well, interest-bearing debt will be incurred with the business expansion and investment. Basically, interest-bearing debt should be balanced at the level that we would require and try -- we need to try to suppress it.

In terms of the financing, we used to do both international and Japan. But now we have changed to a process where we are consolidating it to the Japan market in terms of the treasury.

With regards to the portion, Japan is a focus area and United States is also a focus country. With that in mind, we will consider how the balance should be with regards to the business expansion. The current ratio, I think, should be separately responded to by the IR office.

Thank you very much for your question.

[Operator]

[Interpreted] Kishimoto-san and all the other people who have asked questions. Thank you once again. With that, we would like to bring the first quarter FY 2025 earnings call to a close. Thank you very much for your participation once again. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]