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Japan-Update

Ad agency Dentsu's fight against overwork weighs on profit

Japanese group increasingly relies on overseas acquisitions for growth

Japanese ad agency Dentsu has worked to improve its corporate culture after an employee's 2015 suicide was ruled to be caused by overwork.

TOKYO -- Dentsu's annual operating profit fell despite growing revenue, as Japan's top advertising group took steps to ease a notoriously high-pressure work culture blamed for the death of a young staffer.

The company on Tuesday reported revenue of 928.8 billion yen ($8.63 billion) for the year ended December, up 10.8% over the previous year. But underlying operating profit, a measure taking into account M&A-related costs, slid 1.6% to 163.9 billion yen. With 13 billion yen earmarked for work reforms this year, Dentsu continues to try to recover from the damaging revelations about its work environment.

"Under the circumstances, continuing to chase the top line would be difficult," said executive officer Arinobu Soga at an earnings conference in Tokyo.

CEO Toshihiro Yamamoto set out to drastically overhaul Dentsu's work culture amid a public outcry over the 2015 suicide of a 24-year-old employee in Japan, Matsuri Takahashi, which was ruled the following year as death by overwork, known in Japanese as karoshi.

Efforts in 2017 included increasing staff by close to 300 and automating some office processes, at a cost of about 7 billion yen.

While the domestic business remains its breadwinner, the Japanese ad agency is leaning harder on overseas investments for growth.

Dentsu used its 2013 purchase of the U.K.-based Aegis Group, a force in the European ad world, as a vehicle to chase more deals abroad. Under what is now called Dentsu Aegis Network, it made 36 acquisitions and investments in 2015, 45 in 2016 and another 31 in 2017. These moves have contributed heavily to revenue, although overseas' operations lower profitability meant this growth was unable to offset higher costs at home last year.

But excluding the effects of mergers and acquisitions, Dentsu's revenue is losing steam. Organic growth came to a mere 0.1% last year, down from 5.1% in 2016 and 7% in 2015. By contrast, the global advertising market expanded 3.1%.

Dentsu's 2018 outlook suggests another tough year for the mainstay domestic business. Underlying operating profit is forecast to fall 8.5% to 150 billion yen on a 8.4% rise in revenue to just over 1 trillion yen. Dentsu follows International Financial Reporting Standards.

The group will likely add roughly 200 to its workforce this year, and forge ahead with measures like its recent policy of requiring employees to go home at 10 p.m. Whatever impact they may have on earnings, these efforts appear to be bearing fruit for its employees. A reform plan unveiled by Yamamoto last July calls for cutting the total hours worked in 2017 to under 2,100 per employee, including management. Last year's count was lowered to 2,031 hours from the previous year's 2,166. Staff also used 64% of paid leave, up from 56%.

The CEO has promised to bring each employee's total hours to 1,800 in 2019, a target that would involve cutting overtime to nearly zero.

Dentsu can count on tailwinds from a number of big ad-heavy events this year, including the Winter Olympics, the FIFA World Cup and the U.S. midterm congressional elections. But the advertising industry also faces uncertainty in digital media, where today's growth lies. Consumer products giant Unilever, one of the world's biggest advertisers, is reportedly considering pulling ads from Facebook and Google over concerns about objectionable content on their platforms.

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