Good morning and good afternoon. This is Takeshi speaking. Thank you for joining Dentsu Group's fiscal year 2026 second quarter earnings call. Today, Shigeki, our Global CFO, and I will be giving the presentation. I will begin with a business and strategic update, followed by an overview of our consolidated financial results by Shigeki. Then I will provide an update on our midterm management plan before opening the floor for Q&A. Please refer to our English website for today's material. I will explain our performance for the three months of the second quarter. As we anticipated in February, consolidated organic growth was broadly flat while operating margin was 11.9%, slightly above expectations. By region, Japan exceeded expectations, delivering strong organic growth of 5.4%, making its 13th consecutive quarter of solid growth. Notably, net revenue reached a record high. Americas was slightly below expectations with an organic decline of 6.9%.
Creative continued to be significantly affected by client loss in the previous year. However, with SG&A expense control in place, operating margin was as expected. EMEA was in line with expectations, recording flat organic growth, while media maintained positive growth. Operating margin improved year-on-year to 13.2%. APAC was also in line with expectations. The second quarter's organic growth improved to broadly flat from an organic decline of 7.5% in the first quarter. In addition, SG&A expense control resulted in a significant year-on-year improvement in underlying operating loss. Statutory net profit for the second quarter was JPY 6.1 billion, marking sound recovery in profitability from the previous year when we recorded a goodwill impairment loss. For the first half of the year, both net revenue and underlying operating profit increased year-on-year.
Organic growth was 0.3%, underlying operating profit increased by 6.6%, and operating margin was 12.3%, recording year-on-year improvements. While our first half performance was solid, uncertainty in the macro environment remains. We therefore reiterate our full year guidance, which is an organic growth of 0%-1% and operating margin in the 13% range. We have made some revisions to regional organic growth forecasts, which will be explained later by Shigeki. Let me highlight some of our recent industry recognitions. First, in creative, we once again won numerous awards this year at Cannes Lions and The One Show, both leading international advertising awards. In media, we were named Media Network of the Year at Cannes Lions. In addition, our global media brand, iProspect, has received numerous industry accolades. Turning to our recent client wins.
In the Americas, we saw further momentum in our long-standing strategic partnership with Adobe, who has chosen to engage our CXM business to build industry-specific solutions and deploy our resources within its agentic go-to market platform. This is a powerful example of how our strategic alliances are translating into competitive services and mutual growth. In EMEA, we expanded our media network for Netflix beyond the U.K. While in India, we expanded our media business with Tata Group through a new assignment. In Japan, we have been selected as a partner for a strategic business alliance with SBI Neo Media Holdings. In APAC, we have also been selected as the global media agency of record for Malaysia Aviation Group, the parent company of Malaysia Airlines. Moving on to the progress of our midterm management plan initiatives.
On rebuilding of our business foundation, we spent JPY 12.4 billion for workforce reduction of just under 900 employees. Of the approximately 3,400 workforce reductions planned through fiscal year 2027, we have already completed around 3,000 employees or 88%. In terms of internal investments focusing on enhancing our media services as well as on AI and data and technology, we invested JPY 3.7 billion in the first half. As part of the review of our business portfolio, we sold a non-core asset Swiss-based company. We will continue to steadily implement such initiatives. I'd like to explain our AI initiatives in Japan. in May this year, we announced AI For Growth 3.0, an update to our strategy. Building on the practical expertise we have developed in Japan, we will accelerate the integration of AI into clients' marketing activities. As a core offering, we have launched AI For Growth Suite.
Our AI transformation support is also expanding with the number of projects reaching approximately 300 against our target of 1,000 projects for this year. We are also making significant improvements in productivity internally. We generated more than 107,000 hours of capacity last fiscal year, and we expect to exceed 200,000 hours in the current fiscal year. We will continue to use AI as a driver of growth for our clients and our own competitiveness.
Let me turn to our AI initiatives across our international business. In each market, we are developing and providing AI solutions tailored to local needs. These initiatives span a broad range of areas from supporting client growth to improving our own internal productivity. We have three recent updates. In the U.S., 360i, which has a strong heritage in social, has been relaunched as an AI-native brand. Dentsu UK&I has strengthened its influencer marketing capabilities through a partnership with Meta and built an end-to-end platform covering the whole process from creator selection to ad delivery. In APAC, we have begun rolling out a research tool based on the development framework of the People Model, a Japanese consumer AI persona model, starting with India, and have already secured initial client engagements.
Now, CFO Shigeki will update our financial results.
This is Shigeki. Let me take you through the consolidated financial results for the first half of fiscal 2026. I will start with our key metrics. For the first half of the year, we posted organic growth of 0.3% in line with February expectations. The Japan business continued to perform strongly following the first quarter, exceeding expectations for the first half of the year.
Meanwhile, the Americas performed slightly below expectations, primarily due to CXM business, while EMEA and APAC were largely in line with expectations. Although organic growth was modest, the depreciation of the yen against major currencies drove a 3.7% year-on-year increase in the Group's consolidated net revenue to JPY 583.1 billion and a 6.6% rise in underlying operating profit to JPY 72 billion, resulting in growth in both revenue and profit. This growth in profit was driven by increased profit in the Japan business, combined with SG&A expenses control in the three international regions and the global headquarters. This includes cost-saving benefits from the rebuilding of business foundation. As a result, operating margin was 12.3%, 30 basis points higher than the same period of the previous year and slightly exceeding February expectations. Our underlying basic EPS increased 17.8% year-on-year to JPY 147.29.
On a statutory basis, the operating profit was JPY 83.9 billion, and net profit was JPY 46.3 billion. Statutory profit for the current fiscal year includes the recording of gains on the sale of the Dentsu Ginza building in the first quarter, as well as the gain on sale of shares in CARTA HOLDINGS and the fair value remeasurement gain on its retained interest, which are one-off factors. I will now explain performance for the first half of the year by region. Our Japan business, which accounts for circa 40% of the Group's net revenue, performed well with organic growth of 5%. In contrast, all three international regions saw organic decline. By market, the U.K., Spain, Poland, and India saw growth, while the U.S., Australia, and China experienced declines. Let's take a closer look at each region. Japan continued to perform strongly throughout the first half.
Organic growth remained at the 5% level despite a tough comparison of 5.3% in the first half of the previous year. Underlying operating profit reached a record high while operating margin improved by 100 basis points year-on-year to 25.6%. In the second quarter, net revenue reached a record high while organic growth rate remained positive for the 13th consecutive quarter. Although we had anticipated slower growth in Internet media due to the annualization of last year's large project wins, stronger activity from existing clients and contributions from new business wins drove performance above expectations. TV advertising also exceeded expectations with high single-digit turnover growth while the digital transformation business delivered double-digit growth. Turning to the Americas, the first half organic decline was 5%, slightly below expectations, while operating margin remained in line with expectations at 18.8%.
In the first half, media remained broadly flat while creative recorded a significant decline of 18.2%. This was mainly due to the continued impact of the loss of client in the second half of last year, as well as the annualization of a large client account that expanded in the second quarter of the prior year. Overall, however, performance was broadly in line with expectations. CXM declined 1.5% in the first half and was slightly below expectations. However, we expect contributions from both new and existing clients and continue to anticipate a return to growth in the second half and for the full year. Turning to EMEA, the first half organic growth was broadly flat and in line with expectations. Media maintained growth and continued to perform steadily, while CXM and creative remained in organic decline. Both improved from the first quarter with their rates of decline narrowing.
In CXM, Spain continued to perform strongly, delivering high single-digit growth. However, conditions remained challenging in key markets such as the U.K., Germany, and Switzerland. In creative, new client wins in the U.K. contributed to improved performance. Operating margin reached 13.2% in the second quarter and improved by 410 basis points year-on-year for the first half. This was driven by lower staff costs resulting from the rebuilding of the business foundation, as well as control of operating expenses. Finally, let us turn to APAC. Organic growth was broadly flat in the second quarter, improving from an organic decline of 7.5% in the first quarter. As a result, the first half organic decline was 3.8%, in line with expectations. CXM continued to face challenges with double-digit decline. However, all practices improved from the first quarter, with narrower rates of decline in organic growth.
In particular, creative benefited from the new project in India, while Thailand also delivered growth. APAC significantly reduced its underlying operating loss year-on-year, despite organic decline. This was supported by lower staff costs resulting from the rebuilding of the business foundation, as well as continued cost control measures that reduced operating expenses. Now, I will walk through changes in underlying operating profit from the previous corresponding period. Underlying operating profit for the first half increased by JPY 4.5 billion from JPY 67.5 billion in the same period last year to JPY 72 billion. First, group net revenue decreased by JPY 9.9 billion on a constant currency basis. This reflected a decrease of JPY 11.7 billion in the Japan business as a result of CARTA HOLDINGS becoming an equity method affiliate, partially offset by an increase of JPY 1.8 billion from organic growth.
Organic growth consisted of an increase of JPY 11.2 billion in the Japan business and decline of JPY 10.2 billion in the three international regions. We reduced staff costs by JPY 12.7 billion across the group, particularly in the three international regions. Conversely, operating expenses increased by JPY 0.7 billion across the group, reflecting continued internal investments, primarily in the Americas. As a result, underlying operating profit for the first half reached JPY 72 billion. Finally, we are reiterating our full-year guidance announced in February. As previously reported, consolidated organic growth for the first half was at a level consistent with our February expectations. While the Americas region performed slightly below expectations, the Japan business exceeded them. In light of this situation, we are reiterating our full-year consolidated organic growth guidance of 0% to 1%.
However, regarding regional performance, we are revising the forecast for the Japan business from 2% to 3% to just over 3%, and for the Americas from circa - 2% to circa - 4%. There are no changes to the outlooks for EMEA and APAC. The revision for the Americas region is primarily due to a downward adjustment in the media outlook for the second half of the year. As we explained at our first quarter earnings announcement, we did not downgrade our guidance at that time, despite reduced spend from a major client in the second half, as we had incorporated a certain level of risk into our full-year outlook as of February.
However, we are lowering our full-year outlook for the Americas, reflecting continued uncertainty in the macro environment, a review of new business expectations for the second half, a lower outlook for media due to the reduction or loss of certain existing projects, and a slight reduction in the full-year outlook for CXM base. On first half performance. As I mentioned earlier, while we are lowering our outlook for the Americas, we are raising our outlook for Japan, and therefore reiterating our full-year consolidated organic growth guidance. We are also reiterating our full-year consolidated operating margin guidance in the 13% range communicated in February. Our known dividend forecast for fiscal 2026 also remains unchanged. That concludes my remarks. Takeshi, over to you.
Thank you, Shigeki. I will now move on to the update to our midterm management plan. Here is the summary of the updated midterm management plan. We are maintaining the core policies we outlined in February 2025. However, we have redesigned the plan to cover the period from this fiscal year through to fiscal 2028. First is rebuilding of our business foundation. In addition to remaining on track to achieve the cost reduction target through to fiscal 2027, we plan to reduce global headquarter costs by approximately 30% in fiscal 2028 compared to the 2026 plan. We are also targeting a reduction of around 70 to 80 international entities this fiscal year, with a further reduction of around 50 to 80 entities under consideration by fiscal 2028. Second is a review of our underperforming businesses.
As some markets were expected to remain loss-making this fiscal year, we have extended the timing for achieving the non-loss-making markets target by one year to fiscal 2027. Going forward, we will drive reform efforts by setting clear priorities after estimating the costs required to either restructure or exit unprofitable markets, irrespective of how much capital we have invested so far. Third is investments and M&As. The initiatives referred to as internal investments will be managed as part of our ongoing business operations from fiscal 2027 onwards. We will also redirect a portion of the savings generated through global headquarter cost reductions to strengthen the competitiveness of our AI and data technology domains. Meanwhile, we will continue to take selective and disciplined approach to M&As. Fourth is our priority markets and areas. We will maintain our existing approach here, but we will further clarify each of our regional strategies.
As for AI, we will use open ecosystem as our core strategic principle and will endeavor to further strengthen collaboration with external partners. I will provide a more detailed explanation later in this presentation. Our ambition is to become the growth partner that drives the greatest impact for the growth of clients, partners, and society. Our first priority is to further accelerate business and organizational transformation with a clear focus on restoring profitability and improving financial soundness. We will create greater capacity to invest for future growth while investing in priority areas and strengthening our capabilities. At the same time, we will embed AI more deeply into our business and operations so as to evolve the way we work to unleash greater individual productivity by leveraging the respective strength of people and AI.
At the same time, we will attract, develop, and retain talents with the skills and expertise required in the AI era, with the aim of strengthening the competitiveness of our organization as a whole, and to drive greater impact for the growth of our clients and society as their growth partner. To realize our ambition, we will focus our efforts in 2026 through to 2028 on improving our financial soundness and strengthening the foundation for sustainable competitiveness. Today, we recognize several key challenges, including organic growth below market levels in our international business, a highly complex operating model, and fragmented investments across markets and capabilities. To address these challenges, we will focus on four key agendas. We will accelerate structural transformation with the highest priority on simplifying the organization, optimizing our business portfolio, and strengthening our financial foundation.
At the same time, we will improve our profitability based on streamlined cost and operating models, review of underperforming businesses, and productivity improvements. We will then redeploy the management resources generated through these efforts into priority areas with both growth potential and clear competitive advantages. This will allow us to expand our capabilities and product and develop new revenue models. We will also strengthen alliances with leading partners and standardize our AI-enabled service delivery model so as to further enhance the value we provide to our clients. We will steadily build the foundation required for sustainable growth over this three-year period. Next, I would like to explain about the sources of our competitive advantage, what we refer to as right to win. We have key strength in our talent and capabilities with these deep expertise as well as in our global network.
Another is our ability to build on long-standing relationships of trust with clients and partners, and provide services in an open and client-first way tailored to each client's environment and needs. The segments and markets shown here are just some examples of where we believe we can demonstrate clear competitive advantages. Going forward, we will identify opportunities at the regional and market levels and be more explicit about where we choose to focus. We will continue to deliver value to our clients as a partner that supports their sustainable growth by building trust based on identifying their growth challenges and by applying our deep expertise and delivering consistent and tangible results. Let me now turn to how we will create and deliver value to clients. We will respond to the diverse needs of our clients through a range of growth drivers.
At the core of our value proposition is how we help clients acquire and retain relationships with customers to drive clients' business growth. As AI continues to reshape the business environment, it is becoming increasingly important to help clients build stronger connections with consumers and to help clients transform their businesses. Providing marketing support to clients centered on media will remain as our core business that continue to support our company. We will define a set of core offerings and deploy AI-enabled capabilities consistently across all markets. In markets where we have a clear competitive advantage, we will also strengthen sports and entertainment, which creates relevance in ways that resonate emotionally with people, as well as our capabilities for business transformation.
We will be clear about what needs to be delivered across all markets and where we should go further in our priority markets so that we can consistently drive value across all our chosen areas. Next, please allow me to explain about AI and data-driven growth model. Our approach to AI is not about focusing solely on proprietary products developed in-house. Of course, we will continue to strengthen the proprietary assets that are core to our competitiveness. Beyond that, we will work together with our clients to support their AI adoption and transformation, while also transforming our own operations. Through these efforts, our approach is to pursue AI-driven innovation through co-creation with our clients and partners. To make this happen, building a strong ecosystem of alliance partners will be critical.
We will jointly develop solutions with our partners, combine those solutions in the most effective way, and provide them to clients with a high degree of transparency. We will then scale these innovations across our network, leveraging the competitive strength we have developed in Japan. We believe that this combination will become an important source of our competitive advantage. While our ambition to become a growth partner is shared across the group, the path to achieving it will be tailored to the competitive environment of each region. Let me outline the role of each region, starting with Japan. As the core of the group, we will further strengthen our largest profit base. The Americas will serve as the key engine of global growth. EMEA will focus on restoring profitability. APAC will build the foundation for our next phase of growth.
By each of the four regions fulfilling their respective roles, we aim to drive growth across the group as a whole. Now, let's look at each region in more detail. In Japan, we have a strong profit base centered on marketing and communications, underpinned by long-standing trusted relationships with our clients and partners. At the same time, we see further growth potentials in BX and DX, both within existing clients and through new client acquisition. Building on these strengths and opportunities, we will accelerate growth from three main perspectives. First, we will expand our business across the client value chain with a focus on business transformation and the use of technology. Second, we will broaden our business base by strengthening our approach to growth areas as well as mid-size and small companies.
Third, we will expand our sports and entertainment business by leveraging Japan-originated IP and strengthening collaboration across our global network. Through these initiatives, we will further reinforce our profit base while accelerating the creation of new value. In the Americas, competition for major pitches is intensifying. We also see further room to strengthen investment in growth areas and enhance our ability to deliver integrated proposals across media, creative and CXM. Against this backdrop, we will accelerate growth through three main initiatives.
First, we will strengthen our go-to-market model by engaging earlier with clients, particularly in high growth sectors, and taking more proactive consultative sales approach. Second, we will expand our capabilities in growth areas such as commerce and social. Third, we will expand our CXM-led AI transformation business while standardizing our services offerings and diversifying our commercial m odels.
Through these initiatives, we will further strengthen the Americas as a key engine of global growth. Next is EMEA. To regain share in our key market and improve profitability, we will focus on three areas. First, advancing integrated proposals centered on media. Second, capturing growth opportunities through focused investments in priority markets. Third, improving profitability by consolidating operations and making our service delivery model more efficient. Through these initiatives, we aim to restore our earnings capacity. In APAC, we'll also focus on three areas. First, we will strengthen and expand our capabilities through focused investments in growth markets such as India, as well as priority areas, including data and social. Second, we will enhance integrated proposal by strengthening collaboration across markets and practices. Third, we will rationalize our business portfolio to fund growth investments.
Through these initiatives, we will strengthen our competitive advantage and profitability while building the foundation for the next phase of growth. Let me now turn to our KPIs for 2028. Our highest priorities are restoring profitability and improving financial soundness. By fiscal 2028, we are committed to establishing strong business foundation and client base for the next phase of growth. As a key measure for progress, we will place particular emphasis on our operating margin. To achieve our target of 16%, we will continue to reduce operating costs through our efforts in rebuilding our business foundation. We also plan to reduce global headquarter costs by circa 30% by fiscal 2028 compared to the fiscal 2026 plan. As for dealing with loss-making markets, we have extended the target timeline by one year.
Our goal is for all four regions to be in a position to contribute to shareholder value creation by fiscal 2028. In addition, we will further accelerate the adoption of AI and data and technology and improve productivity per employee. Through these initiatives, we aim to achieve organic growth of 2%-3%. Next, please allow me to explain about our financial policy and approach to capital allocation. On financial policy, we will place even greater emphasis on improving balance sheet and managing cash flow. By rebuilding our financial foundation, we aim to secure sufficient capacity to invest for future growth. On shareholder returns, we will continue to strengthen our earnings capability while considering and implementing all feasible measures towards the early resumption of dividends. In terms of investment, we will prioritize AI and data technology as well as structural transformation that contribute to improved profitability.
As for M&A, we will maintain a selective and disciplined approach in the near term and assess opportunities carefully. While making the investments required to improve profitability and support future growth, we will steadily rebuild the financial foundation needed to resume shareholder returns and drive sustainable corporate value creation. Next, I will address human capital management, governance, and sustainability. We have been steadily advancing the commitments we set out under the mid-term management plan announced in February last year. At the same time, our standings in the major global external assessments, including Sustainalytics and MSCI, have improved, and we have continued to be included in leading ESG indices such as FTSE and Dow Jones Sustainability Indices for multiple consecutive years.
Going forward, we will continue to work on our financial and non-financial initiatives in an integrated way so as to support sustainable growth and enhance corporate value over the medium to long term. Towards the realization of sustainable growth, we will spend the next three years, until 2028, to firmly build a foundation for renewed growth. We have pursued a range of structural transformation initiatives until now, and going forward, we are committed to completing the foundation for renewed growth by implementing strategies and concrete measures that I've outlined today, as well as through even more disciplined management. Beyond that, we will generate a momentum for growth by delivering tangible and consistent results based on our distinct assets, our people, and our partnerships with clients and other stakeholders, as well as the trust and innovation that underline these strengths, which are prominent in Japanese companies.
Our ambition as a group is to become a growth partner that delivers the greatest impact on the growth of clients and society. By realizing this ambition, we will also achieve our sustainable growth. This concludes my explanation on the update to our mid-term management plan. Thank you for your attention.
We will now begin the Q&A session. The first question is by Abe-san of Daiwa Securities.
Abe of Daiwa Securities, thank you for the presentation. I have two questions. First, during the mid-term management plan, the target of operating margin was touched upon. At the beginning of the term, 16% of 2027 was the level explained, but this time it says 16% by 2028. You have withdrawn the operating margin target for 2027, or are you retaining the margin for 2027 and committing to 2028? It seems that the reduction is progressing as planned, so what is the idea behind? That is my first question. Second question, organic growth. Japan is doing well. America is slightly below expectations. Thinking about the full term, are there upside factors or downside factors? To the extent possible, can you explain whether you have more downside or upside factors? Thank you.
Thank you. This is Sano speaking. Abe-san, thank you for your question. Let me respond, and if Shigeki has points to add. He will add some points. First of all, operating margin between 2027 and 2028. We have shifted the target year from 2027 to 2028. As I said, cost reduction areas versus investment for growth will both be done. We do not want to overstretch to reach operating margin of 16% for 2027 to disable investment in AI and data and technology. Rather, we want to do our investment in 2027 and achieve operating margin in the following year.
Second point, whether we have more upside or downside factors. Frankly speaking, I think the answer is flat. This time we disclosed Japan slightly upward and America slightly downward revision. Basically, it is flat.
Thank you very much.
Thank you, Abe-san, for your question. The next question is from Barclays. Julien Roch, please go ahead.
Yes. Good morning. Thank you very much for taking my question. The first one is on page 7. You said you saved 107,000 hours thanks to AI in 2025, and you expect to save 200,000 hours in 2026. How many hours do Dentsu employees work in Japan in 2025? Must be a lot, as Japanese workers are known to work harder than French workers. That is my first question. The second one is, you kept your overall guidance, increased Japan, lowered Americas. If I look at international, grouping the three regions together, to do your minus one for the full year, you need to have a big improvement versus a minus three in the first half. What is going to get better in the second half? Thank you.
Thank you very much, Julien, for your question. I will respond to your question, and Anderson will support if required. Reduction of 200,000 hours in Japan. We have 23,000 to 24,000 employees in total here. On average, just a few percentage. We want to use AI more for the, I suppose, collaborative work. To what extent we can achieve is difficult to say, but we want to continue to work on this initiative. How much additional value have we been able to create? It is difficult to measure that related to AI, but reduction of, I suppose, working hours is relatively easy to measure. We will continue to measure and provide explanation in regards to the estimated hours saved.
In regards to the second half of the fiscal year, your second question, the first half of the year was tough, and how are we going to recover in the second half of the year? In each of the markets, Americas, EMEA, and APAC, and each of the regions, we are expecting the improvement. There are a number of factors for the Americas. Media remains somewhat tough, but CXM recovery has been delayed. That will be realized. EMEA is progressing relatively well. For APAC overall, from first quarter to the second quarter, we have seen positive movement. In APAC, in the third and fourth quarters, we are assuming positive growth. This completes my response. Anderson, do you have anything to add? No additional comment from Anderson, so thank you.
Julien, thank you for the question. The next question will be by Harahata-san of Nomura Securities.
Thank you very much. This is Harahata of Nomura Securities. Thank you for this opportunity. I also have two questions. First, midterm business plan, organic growth in the update, +2% to +3%. Inflation in the international markets has been factored in. With acceleration of competition in international market with AI, the message says that it will take until 2028. We were expecting a turnaround faster, but what is the biggest bottleneck as you achieve profitability in the international market? Page 56, new net wins in the new media. The first half, major negative. Americas was probably the biggest factor, but what is the biggest challenge, and what kind of initiatives will be implemented in the times ahead? Those are my two questions.
Harahata-san, thank you. This is Takeshi speaking.
In reality, the first point I need to mention is this time around 16% has been announced rather than growth. Of course, growth is important, but operating margin, we want to become fit and lean. That is the basic idea behind. Of course, at the earliest possible stage, we want to recover to the highest possible growth rate. But first, we want to become lean in order to achieve the operating margin. This is the message we want to deliver. America's net win. Why this big number? You have probably read press reports, but a few factors have made impacts. I think you have seen these press reports, but has there been any major factor that has weakened our competitiveness? No, that is not the case. How shall I put it? This time, some of the projects that we had lost.
As a result of a few alliances, we had lost some projects and that has caused some impact. Heineken or Netflix, we announced. These are some wins that we usually win. It is not that our fundamental competitiveness has weakened. I hope I answered your question.
Thank you very much.
Thank you, Harahata-san, for your question. The next question is from Mr. Maeda from SMBC Nikko Securities.
My name is Maeda from SMBC Nikko Securities. I also would like to ask two questions. In regards to your competitiveness over the last year or last six months, on a relative basis, your strength in Japan, has that had a positive impact on your international operation? Your peers, they have been investing in AI, and the players are becoming even stronger. From an objective perspective, your competitive advantage, has it improved or has become weakened over the last year or so? After Sano-san becoming the CEO, I understand you have been quite proactive on a global arena based on various information. Has that had a positive impact on competitiveness? That is my first question.
The second question, in your midterm management plan, it has a lot of information, so it is difficult to fathom everything. Going forward towards growth in the future in terms of your structure, including flatter organization, have you made the preparation sufficiently? Do you have the sufficient structure for implementation? The keyword AI, would that become very important? If I was to identify a keyword for growth from your midterm management plan, what would that be? These are my two questions. Thank you.
This is Sano. Please allow me to respond. In regards to competitiveness. Japan competitiveness has improved, which has translated into better numbers. The cause of the competitiveness is nothing special. We have been thoroughly focusing on client first, and we are responding to the needs of our clients.
The clients, whether it be the growth of the business or our brand. That is their focus. What our capabilities that we provide is irrelevant. As a consequence, we have been providing integrated proposal, TV, internet, BX, DX. We have been able to achieve growth in all these areas as a consequence. In regards to our international operation, as you have indicated, after becoming the CEO, I have decided to refocus on these elements. So I have been promoting collaboration that is more flat and more collaborative, and more client-focused type of the structure. That is what we are trying to focus on. That integrated capability is translating to our competitiveness. Where those pitches that we are winning, we may be winning in media and AI. So I suppose the integrated strength are now starting to translate into result.
The Netflix that we won on this occasion, this is something that we have done in U.K., and this is expanded to 22 markets. The client focus, the fact that we know the client well and our flexibility in deploying at the 22 markets, I think these are the areas that the client has now considered highly. Gradually, we have been able to achieve that expansion. So that's my response to your first question. Now, your second question. Do we have the right structure? Yes, we do have the right structure. We are now at the stage of execution. For that, I don't think there are any particular hurdles that we need to overcome. But how could I put it? If we do incorrect restructuring, then we are a people business, and so we are going to lose our competitiveness.
We must make sure that we are focused on becoming more lean.
Maeda-san, thank you for the question. The next question will be by Russell from Edison. Please go ahead.
Hello, good evening. Further presentation. I have three questions, if that's okay. The first one, with your ambition of having no loss-making activities by the end of 2027, there's obviously a number of ways you can achieve that. One is improve the performance of the operations or just sell the operations that are still loss-making. Can you just give some indication of your current expectations for the relative scale of each of those going forward? For example, how many you think you can improve the operations and how many you expect to sell? With that, I'd be interested to get a base of where the group is at the moment, how many countries or entities are currently loss-making.
The second question is, you've indicated a 30% reduction in global head office costs. How many regions actually reach profitability with that measure alone without any improvement in the underlying operations? My third question is, why are there no specific targets for the financial policy and capital allocation? For example, what are the financial conditions that are required to reinstate the dividend? Thank you.
Russell, thank you very much. Regarding the three questions, I will ask Endo-san, Shigeki to respond.
Thank you very much. This is Shigeki speaking. On your first question regarding 2027 as a target year to reduce to zero loss-making markets. Last year, in FY 2025, we made an announcement on our target to reduce loss-making markets to zero. We've already disclosed this with Australia and China. In these markets already we've begun to see recovery. Of course, we sold some businesses, in New Zealand, CXM, and China turnaround has been achieved, and this year, operating margin has gone into the positive sphere. So the procedure is first a turnaround to improve profitability and make it profit-making. That is the priority. Eventually, if we see, even after two or three years, it's difficult to turn around the business, then other means will be applied. At the moment, how many entities? We don't disclose that information, so I solicit your kind understanding on that point.
With certainty from the current status, in comparison in 2027 or 2028, we already have a visible plan to improve towards 2027 and 2028. So we will with certainty deliver results. The second point on global headquarters, 30% reduction. This is not just simple cost savings or cost reduction. At the global headquarters, mission-critical tasks exist, and we will reconsider those mission-critical tasks and, to the extent possible, maximize automation, simplify through technology to deliver outcome. As for financial value, JPY 12 billion of reduction is expected, and for each region, operating margin targets have been set. So all of that together will add up to 16%. Already for each region or end market, operating margin are not disclosed, but towards each target, each market will be making efforts to reduce cost and also make investments.
Regarding capital allocation, as for items, as I said, mid to long-term investment will be prioritized. AI data and technology areas will be prioritized in terms of investment and further benefit to shareholders. At the earliest possible timing, we want to resume dividend payment and in terms of financial policy, to the extent possible by maximizing profits, we will right-size our balance sheet and control cash flow. Those would be our priorities.
In terms of KPI, we have already indicated the numbers, and regarding the balance sheet, to a certain extent, debt equity ratio will be kept in mind. You will find out if you do your own calculation. But regarding debt equity ratio, to the extent possible, we will benchmark our balance sheet to bring it to a certain level. Thank you. Regarding details, there are factors we disclose, factors we do not disclose, and we solicit your kind understanding. Thank you.
Thank you, Russell, for your question. The next question is from Kishimoto-san from Mizuho Securities.
My name is Kishimoto from Mizuho Securities. Thank you for this opportunity to ask a question. I have one question. For the Japan business second half for the fiscal year 2026, what is the advertising spend expectation? Because of the Middle East situation, there could be a negative impact on the advertising environment. In the second half of last year, we saw growth due to various events.
But this second half of the year, it seems that organic growth will slow down a little bit, but will there be a negative impact from market impact? Also, right now, TV and internet, I do not think it is dependent on certain area growing, but there are, I suppose, the strengths and weaknesses for the different media. In particular, could you give us the expectation for the second half of the year, particularly for media and TV?
Thank you, Akitomo-san. Thank you for your question. Please allow me to respond. Last fiscal year, we had the expo, we had the World Athletics Championships, and so we do have that impact from the last fiscal year in that regard. But as I said before, there are some uncertainties. But it is not the case that the clients have indicated suppressing their investment. The share price continue to achieve record levels, and due to higher interest rate, the companies, their performances have progressed quite well, particularly in the finance sector. Of course, there are different color, but overall, the impression is not that bad overall. But of course, there are some uncertainties, and so we have taken somewhat of a conservative outlook.
But as for TV and internet, the internet, the growth rate remains to be close to double digit. We will continue to focus on internet. For example, in the second quarter this year, something started, and this was on the news, and so advertisement being utilized on ChatGPT. We have also worked on that ahead of others. We are seeing new areas expanding continuously, and so we will continue to focus on the internet domain. TV too. Maybe we have kind of the bottom belt. TV, in comparison to the past, we are now able to take measurements using connected TVs. TV and internet, when they are integrated, what becomes the optimal? That is what the companies are wanting to understand. There, we will continue to provide integrated proposals. Also, Dentsu Inc.
in January this year, we have the retail marketing, the bureau. In the second quarter, we have established a joint venture company with 7-Eleven. Retail media is, in that regard, growing quite strongly. TV, digital, retail media, as I mentioned before, and also in the second quarter this year, OOH also saw a strong growth. Using various media, we are pursuing what is the best, what is optimal. We want to provide the optimal proposal to our clients. This is the basis of, I suppose, the competitiveness, and we will continue to work on that. This was a little bit long, but that completes my response. Thank you.
Akitomo-san, thank you for the question. Thank you for the several questions. Hosoi-san of SBI Securities, please go ahead.
My name is Hosoi of SBI Securities. Thank you for the presentation. I have two questions. First, AI progress was presented, and AI's financial impact will be used for revenue growth for client and internal growth for your company. For fiscal year 2028, what are your assumptions? This time, midterm management plan 2028 operating margin target, to what extent have you factored in the AI positive impact? Is it conservative as a commitment, or do you think that it is a realistic assumption? Secondly, Americas outlook. Reduction for the full year, but you consider it as a growth engine for the midterm management plan. One time off factors versus structural factors, what was the split? In order to return to positive growth, how do you judge the level of pipeline at the moment? Thank you.
Thank you, Hosoi-san. AI is truly difficult and challenging. I use this analogy quite frequently, and you probably use Microsoft Excel. On Excel, how much will our business expand? It is close to that. AI is introduced in all corners of our tasks, and that applies to reduction of working hours and higher values for clients. It is not possible to accurately measure the impact from AI. That is the struggle we are challenged with. AI included, per capita net revenue or per capita operating profit improvement per employee is being pursued, and that will be the total result of AI and our own improvements. It is difficult to carve out the AI factor alone. The second point is the Americas, and we will make it a growth engine.
In the report we have issued, ad spend growth in the Americas, it's the biggest market, but it continues to achieve growth of 5%. That's our expectation, and we want to capture such growth opportunities in that market. Structural factors we aren't mindful of so many structural factors, especially on the media side. Soundly performance was achieved last year, and this year, we had lost a few major accounts, which had caused some impact, but we consider that as a one-time factor, and one-time factor continued in the first half. This time around, slowdown in CXM was a major factor in the Americas, and we didn't really see much slowdown in the media side. For years, in CXM, we had been struggling, but we think we've seen the bottom finally. In that sense, we want to turbocharge to turn around the business.
I hope that I answered your question.
Thank you very much. I have one follow-up question, if I may. This time around, target for the midterm management plan, is that conservative or is it backed by the current assumption of strength you have?
Thank you very much. Is it realistic or conservative? It's difficult to respond, but frankly speaking, historical midterm management plans, we underperformed the numerical targets. Under the new executive team, we have set targets that are achievable. We can say it's realistic. We can also say they are conservative, but at least, how should I put it? It's not an overstretched goals that we may not be able to meet. Thank you.
Thank you very much.
Thank you, Hosoi- san, for your question, and thank you everyone for your questions. With that, I'd like to conclude today's earnings call. Thank you very much, everyone, for asking questions as well as participating despite your busy schedule. Thank you