DENTSU GROUP INC. Q1 FY2026 earnings call

- Strategic Direction * Dentsu's core goal is to become a growth partner for clients' medium- to long-term growth, built on three pillars: strengthening client centricity, enhancing organizational agility, and accelerating cross-business collaboration. * Client centricity means proactively anticipating unrecognized client challenges, rather than only responding to stated current needs, to deliver solutions that drive sustained client business and brand growth. * Agility is being pursued by streamlining management layers to reduce distance between executive leadership, front-line teams, and clients, maintaining an optimal scale that balances impact capacity and operational flexibility. * Collaboration integrates Dentsu's diverse internal capabilities with external partner and client capabilities to deliver seamless end-to-end services from strategy to execution.

- Operational Restructuring Progress * EMEA: Effective July 2025, EMEA's 7 existing clusters will be consolidated into 3, with regional cluster CEOs reporting directly to the Global CEO, to eliminate redundant management, accelerate decision-making, and improve alignment with global strategy. The restructuring is expected to deliver an additional 1.7 billion yen in annual cost savings, which are not yet included in current guidance. * ANZ (Australia and New Zealand): Dentsu will divest its underperforming, low-synergy CRM sub-segment of its CXM business, with closing expected in Q3 FY26. The divestiture will reduce annual costs by approximately 2.5 billion yen, with additional annual function-related cost reductions of several hundred million yen expected post-close. High-growth Experience, Commerce, and Data & Technology CXM domains will remain. Dentsu expects ANZ to return to low single-digit organic growth in FY26 following three consecutive years of organic decline.

- Growth and Capability Initiatives * Multiple large global and regional client wins in Q1: Heineken global media, Farmers Insurance creative (Americas), i-Health integrated AOR (Americas), MUFG marketing strategy partner (Japan), Samsung Electronics Europe CRM transformation (16 markets, EMEA), and Tapestry regional media (EMEA, APAC, Japan). Dentsu also won multiple industry awards, including ADFEST Network of the Year for the 5th consecutive year (10th total win). * International Media business is prioritizing four growth areas: AI-powered media planning, proprietary digital solutions, retail media capabilities, and social media capabilities. * AI Strategy: Dentsu's "AI for Growth" vision combines human intelligence with AI to drive client and internal growth, rather than positioning AI only as an efficiency tool. Dentsu prioritizes flexible, open AI architectures tailored to individual client data and usability needs, rather than a closed proprietary platform. In Japan, over 4,500 internal AI agents and 1,300 AI applications are in use; Mugen AI Ads, a digital advertising optimization solution, is deployed by over 200 clients and delivers an average 1.5x improvement in ad effectiveness. An updated AI For Growth 3.0 strategy will be announced later this month. Globally, the dentsu.Connect unified operating platform has over 1,900 enrolled clients, with an update scheduled for Q4 FY26, and the Client IQ internal AI knowledge tool improves the speed and quality of client proposal development. * Mid-term management plan review is underway, with an update expected in the coming months.

Consolidated net revenue for Q1 FY26 increased 2.7% year-on-year to 295.1 billion yen. Underlying operating profit rose 11.5% to 37.8 billion yen, with an operating margin of 12.8% (up 100 basis points year-on-year). Statutory net profit was 40.2 billion yen, driven largely by 22 billion yen in gains from the sale of the Dentsu Ginza Building. Segments by region: - Japan: 44% of consolidated net revenue. Posted 4.7% organic growth (12th consecutive quarter of positive growth, 6th consecutive quarter of mid-single-digit high growth). Organic growth was supported by double-digit growth in internet media (9th consecutive quarter), mid-single-digit growth in TV ads, and near double-digit growth in digital transformation. A reclassification of CARTA HOLDINGS reduced reported net revenue by 0.6%, but lower SG&A drove an improved operating margin of 30.8% (up 180 basis points year-on-year). - Americas: Posted 3% organic decline, in line with expectations. Media achieved 0.5% organic growth; CXM saw a slight organic decline (recovery for 5 consecutive quarters); Creative declined 12.4% due to prior year project losses and reduced client spending. Operating margin was 16.1% (down 160 basis points year-on-year), in line with expectations. - EMEA: Posted 0.8% organic growth, in line with expectations. Reported net revenue rose 15% year-on-year driven by favorable yen weakness. Media grew 5.3% organic; CXM declined 5.7%; Creative declined 5%. Operating margin was 3.1%, with underlying operating profit turning positive due to cost-cutting initiatives. - APAC (excluding Japan): Posted 7.5% organic decline, in line with expectations. Media declined 2.5% (driven by 2025 comparative year timing effects in Australia); CXM declined 24.2%; Creative declined 9.5%. Cost-cutting initiatives offset revenue declines, leaving underlying operating loss flat with the prior year period.

- Full-year FY26 guidance announced in February 2025 is maintained, including the expected organic growth ranges and outlook for all regions: Japan 2% to 3% organic growth, Americas ~2% organic decline, EMEA ~1% organic growth, APAC ~1% organic growth. - While Q1 organic growth and operating margin slightly exceeded management expectations, guidance is unchanged because the increased uncertainty in the global macro environment makes it impossible to reasonably estimate the full impact of potential risks on full-year performance at this time. - The expected full-year cost improvement to Dentsu's retained deficit position is maintained: distributable profit is projected to improve by 70 billion to 80 billion yen to ~negative 160 billion yen by the end of FY26, with non-consolidated net assets turning positive at ~20 billion yen. Management continues to target dividend resumption through improved business performance and non-core asset sales. - The expected nonpayment of the FY26 dividend remains unchanged from prior guidance.

- Global macroeconomic uncertainty has increased due to prolonged geopolitical risks and elevated resource and energy prices, which reduces visibility into client marketing spending demand and business conditions globally. - Geopolitical risk in the Middle East has had some limited impact on regional advertising sentiment, but the region contributes less than 1% of consolidated net revenue (3% of EMEA revenue), so no material impact to overall group performance is expected. - Rising oil prices have created a mood of caution and hesitancy among global advertisers, with softer demand trends beginning to emerge in April 2025, though the magnitude of the slowdown remains modest so far. - Americas is expected to face revenue pressure from reduced spending with certain large Media clients starting in the second half of FY26, though this risk is already partially factored into current full-year guidance. - EMEA and APAC face continued macroeconomic uncertainty that requires ongoing vigilance for potential demand weakness, despite the current maintained full-year guidance.

Q: Has rising geopolitical risk already impacted advertising demand by region? What challenges motivated the new EMEA and ANZ restructuring initiatives, and are the projected cost savings already included in disclosed guidance? A: Geopolitical risk in the Middle East has created some limited impact, but the region is too small to affect overall group results. Globally, rising oil prices have created increased caution among advertisers, with modest signs of slower demand emerging in April across most regions. In EMEA, the prior 7-cluster structure created redundant management layers and overlapping costs; restructuring will cut red tape and speed up decision-making, and the projected 1.7 billion yen in annual cost savings are not yet included in guidance. In ANZ, the divested CRM CXM business had low profitability and limited synergy with Dentsu's core Media and Creative businesses; some cost improvements were factored into prior projections, with additional savings coming in future periods.

Q: Beyond the announced restructurings, what are the remaining challenges for improving international business agility and competitiveness against the large 'Big 3' agency groups? Will Dentsu pursue external partnerships, or focus on organic strengthening? A: Dentsu is shifting to a fully flat organizational structure, with all regional cluster CEOs now reporting directly to the Global CEO to cut hierarchical delays. The company is also updating internal KPIs and behavioral norms to break down internal silos and improve cross-practice collaboration. While Dentsu is smaller than the Big 3, it has been winning large global pitches by focusing on integrated team-based value rather than competing purely on scale; client decisions increasingly prioritize solution quality and team chemistry over raw size. Dentsu will proactively deepen strategic technology partnerships with firms like Adobe and Salesforce (who are also Dentsu clients) to strengthen capabilities, and does not plan to pursue large financial or M&A-based partnerships.

Q: Can Dentsu expand AI capabilities beyond core advertising into new growth areas, leveraging technology platform partnerships? Is there justification for maintaining full-year APAC guidance despite the large Q1 organic decline? A: Yes, Dentsu is already expanding AI-enabled services beyond advertising. One example is the new HR for growth offering built in partnership with Microsoft, which uses client company data and AI to identify internal talent silos and improve workforce utilization; this initiative has launched in Japan and will be rolled out to other global markets. For APAC, despite the weak Q1 result, management maintains guidance because Dentsu has already won several new competitive pitches in the region that are expected to contribute revenue later in the fiscal year, providing sufficient confidence to meet the full-year target.