The figures for these Financial Statements are prepared in accordance with the accounting principles based on Japanese law. Accordingly, they do not necessarily match the figures in the Annual Report issued by the Company, which present the same statements in a form that is more familiar to foreign readers through certain reclassifications or summarization of accounts. Consolidated Settlement of Accounts for the March 31, 2010 Shiseido Company, Limited Listing: Tokyo Stock Exchange, First Section (Code Number: 4911) Head Office: Tokyo, Japan URL: http://www.shiseido.co.jp/e/ Representative: Shinzo Maeda, President/CEO & Representative Director Contact: Yukihiro Saito, Head of Investor Relations Department Tel. +81-3-3572-5111 Annual Meeting of Shareholders: June 25, 2010 (plan) Filing of Financial Report: June 25, 2010 (plan) Start of cash dividend payments: June 28, 2010 (plan) 1. Performance in the March 31, 2010 (April 1, 2009 March 31, 2010) * Amounts under one million yen have been rounded down. (1) Consolidated Operating Results (Millions of yen; percentage figures denote year-on-year change) Net Sales Operating Income Ordinary Income Net Income Mar. 2010 644,201 [ 6.7%] 50,350 [+0.9%] 51,485 [ 1.1%] 33,671 [+73.8%] Mar. 2009 690,256 [ 4.6%] 49,914 [ 21.4%] 52,061 [ 20.0%] 19,373 [ 45.4%] Net Income per Share (Yen) Fully Diluted Net Income per Share (Yen) Return on Equity Ordinary Income/ Total Assets Operating Income/ Net Sales Mar. 2010 84.62 84.53 9.8% 7.5% 7.8% Mar. 2009 48.04 47.96 5.4% 8.1% 7.2% Reference: Equity in earnings of affiliates: Fiscal year ended Mar. 2010: 61 million Fiscal year ended Mar. 2009: 57 million 1
(2) Consolidated Financial Position (Millions of yen, except for per share figures) Net Assets Total Assets Net Assets Equity Ratio (%) per Share (Yen) Mar. 2010 775,445 365,207 44.9 875.72 Mar. 2009 606,568 351,951 55.6 839.89 Reference: Equity at year-end (consolidated): Fiscal year ended Mar. 2010: 348,323 million Fiscal year ended Mar. 2009: 337,224 million (3) Consolidated Cash Flows Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities Cash and Cash Equivalents at Year-End Mar. 2010 69,431 (204,884) 120,359 77,157 Mar. 2009 42,767 (28,157) (32,283) (91,857) 2. Cash Dividends (Cut-off Date) Mar. 2009 Mar. 2010 Fiscal Year Ending Mar. 2011 (plan) Cash Dividends per Share (Yen) 1Q 2Q 3Q Year-End Full Year Total Dividends Paid (Full Year) (Millions of Yen) Payout Ratio (Consolidated) Dividends Paid/ Net Assets (Consolidated) 25.00 25.00 50.00 20,148 104.1% 5.6% 25.00 25.00 50.00 19,881 59.1% 5.8% 25.00 25.00 50.00 64.2% 3. Projections for the Fiscal Year Ending March 2011 (April 1, 2010 March 31, 2011) First Half Ending Sept. 2010 Fiscal Year Ending Mar. 2011 (Millions of yen, except per share figures; percentage figures denote year-on-year change) Net Income Operating Ordinary Net Sales Net Income per Share Income Income (Yen) 323,000 [+1.8%] 21,500 [ 5.4%] 20,500 [ 13.4%] 11,500 [ 35.3%] 28.91 660,000 [+2.5%] 53,000 [+5.3%] 51,500 [+0.0%] 31,000 [ 7.9%] 77.94 Note: These forecasts do not include the results of Bare Escentuals, which became a subsidiary in March 2010. We are currently studying a number of aspects, such as market valuation of assets related to the acquisition, as well as number of years for amortizing goodwill. Once such information becomes clear, we disclose it as swiftly as possible 2
4. Other (1) Significant changes in subsidiaries (scope of consolidation) during period: Yes Note: For more details, refer to 1. Scope of Consolidation (page 21). (2) Changes in accounting principles, procedures, disclosure methods, etc., pertaining to preparation of consolidated financial statements (Those to be stated as Changes to the Basis of Presenting Consolidated Financial Statements ): 1. Changes associated with revision in accounting standards: Yes 2. Other changes: No (3) Shares outstanding (common stock) at year-end 1. Number of shares outstanding (including treasury stock) Fiscal year ended Mar. 2010: 410,000,000 Fiscal year ended Mar. 2009: 410,000,000 2. Number of treasury shares outstanding Fiscal year ended Mar. 2010: 12,241,810 Fiscal year ended Mar. 2009: 18,489,386 Note: For information about the number of shares forming the basis for calculating net income per share, please refer to Per Share Information on page 28. (Reference) Summary of Non-Consolidated Financial Results 1. Performance in the March 31, 2010 (April 1, 2009 March 31, 2010) (1) Operating Results (Millions of yen, rounded down; percentage figures denote year-on-year change) Net Sales Operating Income Ordinary Income Net Income Mar. 2010 244,470 [ 7.6%] 14,874 [+73.3%] 23,515 [ 11.5%] 21,012 [+29.0%] Mar. 2009 264,511 [ 3.2%] 8,583 [ 47.2%] 26,564 [ 14.4%] 16,294 [ 31.6%] Net Income per Share (Yen) Fully Diluted Net Income per Share (Yen) Mar. 2010 52.81 52.75 Mar. 2009 40.41 40.34 (2) Financial Position Total Assets (Yen) (Millions of yen, except per share data, rounded down) Net Assets Equity Ratio Net Assets per Share (Yen) (%) (Yen) Mar. 2010 612,417 339,108 55.3 851.47 Mar. 2009 481,137 343,724 71.4 855.44 Reference: Equity at year-end: Fiscal year ended Mar. 2010: 338,678 million. 3
Appropriate use of business forecasts; other special items In this document, statements other than historical facts are forward-looking statements that reflect our plans and expectations. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results and achievements to differ from those anticipated in these statements. Please refer to page 11 1. Operating Results, 1.1 Analysis of Operating Results, Outlook for the Fiscal Year Ending March 31, 2010 for information on preconditions underlying the above outlook and other related information. 4
1. Operating Results (1) Analysis of Operating Results (Review of Performance in the March 2010) In the fiscal period under review (year ended March 31, 2010), consolidated net sales declined 6.7% year-on-year. Domestic sales fell below the previous year s level, reflecting continued weakness of consumer sentiment. By contrast, overseas sales grew steadily on a local-currency basis, but decreased significantly in yen terms due to the yen s appreciation. Operating income edged down 0.9% year-on-year. Here, the marginal losses stemming from the revenue decline were covered by increased efficiency in selling, general and administrative expenses. Accordingly, operating profitability for the year was 7.8%, a 0.6-point improvement from the previous year. Ordinary income was down 1.1%, due mainly to poorer results from interest inflows and outflows. Net income jumped 73.8% thanks to a year-on-year decline in taxes, as well as improved extraordinary items. Consolidated Performance Domestic Cosmetics Overseas Cosmetics Others Fiscal Year Ended Mar. 2010 397,567 236,600 10,033 Percent of Net Sales 61.7% 36.7% 1.6% Fiscal Year Ended Mar. 2009 412,337 260,915 17,002 Percent of Net Sales 59.7% 37.8% 2.5% Year-on-Year Increase/Decrease Amount % change 14,770 24,315 6,969 3.6% 9.3% 41.0% Net Sales 644,201 100.0% 690,256 100.0% 46,054 6.7% Domestic Sales 406,655 63.1% 428,251 62.0% 21,596 5.0% Overseas Sales 237,546 36.9% 262,004 38.0% 24,458 9.3% Operating Income 50,350 7.8% 49,914 7.2% 436 +0.9% Ordinary Income 51,485 8.0% 52,061 7.5% 576 1.1% Net Income 33,671 5.2% 19,373 2.8% 14,297 +73.8% Consolidated Income/ Nonconsolidated Income 1.60 times 1.19 times 5
(Review by Business Segment) Domestic Cosmetics Fiscal Year Ended Mar. 2010 Fiscal Year Ended Year-on-Year Increase/Decrease Mar. 2009 Amount % change Sales to Outside Customers 397,567 412,337 14,770 3.6% Intersegment Sales or Transfers 2,282 5,600 Total Sales 399,849 417,938 Operating Income 39,355 33,004 +6,351 +19.2% Operating Profitability 9.8% 7.9% +1.9% Sales Sales in the domestic cosmetics business segment decreased 3.6%. Amid ongoing structural changes in the market caused by polarization toward high-priced and low-priced products, we stepped up our distinction and concentration efforts. However, we were unable to amply address the desire of customers for lower-priced items in the weakened consumer sentiment environment. In the cosmetics division, sales of counseling products, self-selection products and toiletries all fell below the previous year s levels. During the year, we sought to address structural market changes stemming from ongoing polarization through more meticulous alignment of channels and brands. We also focused on high-priced counseling products in the mainstay channels of cosmetics specialty stores, department stores and general merchandising stores, as well as low-priced self-selection items and toiletries in the key drugstore channel. With respect to high-priced counseling products, we sought to expand sales of relationship building brands/lines (through which we deepen relationships with customers), centering on skincare products, and achieved steady results. For cosmetics specialty stores, we implemented specified sales strategies for the Bénéfique line, which is dedicated to specialty stores. We also advanced our PS Program*, which provides powerful support for specialty stores requesting stronger initiatives from our company. For department stores, we pursued a double counter strategy with the top-end prestige Clé de Peau Beauté brand, and we stepped up efforts to nurture the Revital Granas line, targeting new luxury women in their 30s or older. For general merchandising stores, we further reinforced the in-store responsiveness capabilities of beauty consultants and, similar to department stores, we made stronger efforts to cultivate the Revital Granas line. With respect to low-priced self-selection products and toiletries, we focused on expanding sales of hair-care, skincare, and men s mega brands/lines in the self-selection sections of drugstores and general merchandising stores. To address the broadening hair-care needs of customers, we launched the gold-colored Head Spa line of real-texture care products under the TSUBAKI brand. This brand now has three lines: red, white and gold. We also renewed the Aqua Label skincare brand, and we released Uno Fog Bar, a completely new mist-based styling agent for men. At the same time, we sought to entrench our Diamond Sales** approach to large-scale clients, thus deepening our ties with that channel. However, promotional products, centering on items in the middle price range, were impacted by weakened consumer sentiment, while self-selection products and toiletries were affected by the trend toward low prices, so we were unable to generate solid results in these areas. In the professional division, sales fell below the previous year s level. In this business, we focused on reinforcing our presence in wedding halls and wedding-oriented beauty salons in hotels, while concentrating on mainstream salons and forming contracts with new salons. In the merchandise sales area for beauty salons, we continued pursuing sales activities emphasizing quality of proposals. In the healthcare division, sales increased year-on-year, thus maintaining an upward trend. In the beauty supplement market, sales of The Collagen continued increasing. We also launched IN&ON, a line 6
combining beauty foods and cosmetics for women s in their 40s. * PS Program: The program is aimed at specialty stores that anticipate growth and desire stronger initiatives from the Company. It is a strategy for focused nurturing tailored to attributes of each store according to common targets set together with the Company. ** Diamond Sales: Sales system in which Shiseido and structured retailers work together as a team to discuss their respective functions and organizations, including product purchasing, in-store matters and logistics. Operating Income Despite a decrease in marginal gain due to the fall in segment sales, the Company reported a 19.2% increase in segment operating income thanks to increased efficiency of marketing expenditures and other components of selling, general and administrative expenses. Major New Products Counseling: Elixir White (skincare line: new skin-lightening item) Revital Granas (high-end skincare line: highly functional concentrated care item) Maquillage (makeup line: addition of new colors, foundation and lip gloss) Elixir Superieur Retino Vital (skincare line: highly functional anti-aging item) Self-selection: Aqua Label (skincare line: renewal of skin and moisturizer products) Integrate (makeup line: addition of new foundations) Ma Cherie (hair-care line: renewal) Uno Fog Bar (men s line: new type of hair styling product) Toiletries: TSUBAKI (hair-care line: addition of Head Spa range) Healthcare: IN&ON (new line combining beauty foods and cosmetics) Overseas Cosmetics Fiscal Year Ended March 2010 Fiscal Year Ended Year-on-Year Increase/Decrease March 2009 Amount % change Sales to Outside Customers 236,600 260,915 24,315 9.3% Intersegment Sales or Transfers 1,641 1,734 Total Sales 238,241 262,650 Operating Income 9,121 14,994 5,872 39.2% Operating Profitability 3.8% 5.7% 1.9% Sales In this segment, our performance in Europe was affected by economic recession, but in the Americas our business benefited from signs of economic turnaround in the second half of period. We also posted solid results in Asia, driven by China. Accordingly, overseas sales grew 3.0% year-on-year in local-currency terms. After translation into yen, however, sales in this segment declined 9.3%, due to the yen s appreciation. During the year, we strove to nurture the global brand SHISEIDO, which is sold in various countries worldwide as the Group s representative prestige brand. Following the launch of new makeup items, we 7
unveiled SHISEIDO Future Solution LX, a premium skincare line. We also renewed our display designs at department store counters, including by introducing new symbolic signs, and thus refreshed our global image. In addition, we advanced our City Concept strategy, which concentrates on marketing activities in cities that have high flow-on effects in their respective nations. In the top-priority market of China, we maintained a high level of growth by actively and continuously pursuing channel-specific brand marketing, revolving around our dedicated brands for China. In Chinese department stores, we reinforced our presence in the makeup area. Drawing on our sales foundation built up through skincare products, for example, we introduced Maquillage, a mega brand prominent in Japan. We also renewed AUPRES, a dedicated makeup brand for department stores in China. In cosmetics specialty stores, we increased the number of outlets carrying our products, and worked to expand sales at existing stores, including by reinforcing sales of URARA, a dedicated brand for China. In the masstige* market, we significantly boosted sales of Za, which targets middle-income earners in Asia, and we broadened the sales domain of MAJOLICA MAJORCA, self-selection-style makeup line, to cover various nations in Southeast Asia. In these and other ways, we sought to strengthen our foundation for targeting market expansion. We also made good progress in expanding our business in new markets. For example, we launched the global brand SHISEIDO in Egypt and Morocco, marking our first foray into Africa, as well as in Laos and Azerbaijan. As a result of these efforts, the global brand SHISEIDO has a presence in 73 world nations and regions, including Japan. In addition, distributed to our overseas beauty consultants copies of the Shiseido BC Omotenashi Credo, a set of guidelines designed to help realize the Spirit of Omotenashi a strength of the Company. This led to improved quality of our in-store response activities. In the European and North American fragrance markets, we added a new range, called A Scent by Issey Miyake, to the Issey Miyake line of designer fragrances sold by Beauté Prestige International. We also reinforced the brand power of our Jean-Paul Gaultier and Narciso Rodriguez lines. In the professional division, Zotos International promotes our products to beauty salons, centering on Europe and North America. During the year, that company pursued proactive marketing activities, including the reinforcement of the JOICO brand and the launch of a new hair-care line called Diamond Shine. In the esthetic and spa fields, however, Group company Decleor, based in France, struggled in the face of a weak European market. Masstige: Coined word from mass and prestige. Masstige products are positioned as more expensive than mass-produced items, but more moderately priced than prestige products. Operating Income Despite increases in both revenue and earnings on a local-currency basis, operating income in this segment declined 39.2% year-on-year, due to the significant impact of the yen s appreciation. Major New Products Cosmetics: SHISEIDO Future Solution LX (global brand: new skincare line) AUPRES (dedicated brand for China: innovation of makeup line) A Scent by Issey Miyake (designer fragrance: new line for women) 8
Others Fiscal Year Ended Mar. 2010 Fiscal Year Ended Year-on-Year Increase/Decrease Mar. 2009 Amount % change Sales to Outside Customers 10,033 17,002 6,969 41.0% Intersegment Sales or Transfers 6,188 11,551 Total Sales 16,221 28,553 Operating Income 1,716 1,480 +235 +15.9% Operating Profitability 10.6% 5.2% +5.4% Sales Sales from other businesses fell 41.0%. This was mainly because of our withdrawal from the boutique business at the end of the previous fiscal year. The frontier sciences division, an area slated for future growth, covers cosmetic raw materials, medical-use pharmaceuticals, chromatography, and cosmetic dermatology products. In this division, our cosmetics and bio-hyaluronic acid, a medical-use pharmaceutical product, performed well in Japan and overseas. We also increased sales of 2e and Navision, two cosmetics lines for medical institutions. Operating Income Operating income from other businesses grew 15.9% thanks to improved profitability stemming from our withdrawal from the boutique business. Review by Geographical Segment and Overseas Sales Domestic sales declined year-on-year, but domestic operating income increased owing to improved efficiency of selling, general and administrative expenses. On a local-currency basis, overseas sales increased thanks to the contribution of Asia, highlighted by continued growth in China. However, sales declined in the Americas and Europe, where the impact of economic recession remained. After translation into yen, sales in Europe reported a double-digit decline, and sales in the Americas and Asia also fell below previous-year levels. On a local-currency basis, overseas operating income increased year-on-year, with particularly strong growth in Asia-Oceania. In yen terms, however, operating income declined due to the appreciation of the yen against other currencies. 9
Sales by Geographic Segment (by Location) Fiscal Year Ended Mar. 2010 Percent of Net Sales Fiscal Year Ended Mar. 2009 Percent of Net Sales Year-on-Year Increase/Decrease Amount % change Japan 408,077 63.3% 429,963 62.3% 21,885 5.1% Americas Europe Asia/Oceania 45,720 82,393 108,010 7.1% 12.8% 16.8% 50,656 100,033 109,601 7.3% 14.5% 15.9% 4,936 17,640 1,591 9.7% 17.6% 1.5% Outside Japan 236,123 36.7% 260,292 37.7% 24,169 9.3% Net Sales 644,201 100.0% 690,256 100.0% 46,054 6.7% Operating Income by Geographic Segment (by Location) Fiscal Year Ended Mar. 2010 Percent of Regional Sales* Fiscal Year Ended Mar. 2009 Percent of Regional Year-on-Year Increase/Decrease Sales* Amount % change Japan 24,042 5.6% 18,432 4.0% +5,609 +30.4% Americas Europe Asia/Oceania 3,216 5,647 15,074 6.0% 6.5% 13.9% 3,275 8,258 16,778 5.6% 7.8% 15.3% 59 2,611 1,704 1.8% 31.6% 10.2% Outside Japan 23,937 9.6% 28,313 10.3% 4,375 15.5% Elimination 2,370 3,168 797 25.2% Operating Income 50,350 7.8% 49,914 7.2% +436 +0.9% * Based on regional sales, including intra-group sales between regions. Overseas Sales (by Destination) Americas Europe Asia/Oceania Fiscal Year Ended Mar. 2010 48,504 73,773 115,269 Percent of Net Sales 7.5% 11.5% 17.9% Fiscal Year Ended Mar. 2009 54,859 88,549 118,595 Year-on-Year Increase/Decrease Percent of % change Net Sales in local Amount % change currency terms 8.0% 12.8% 17.2% 6,354 14,776 3,326 11.6% 16.7% 2.8% 1.7% 2.4% +8.9% Overseas Sales 237,546 36.9% 262,004 38.0% 24,458 9.3% +2.9% 10
(Outlook for the Fiscal Year Ending March 2010) Performance Outlook Although there are signs of global economic recovery, business conditions surrounding the Shiseido Group will remain challenging in the core domestic market. Nonetheless, the Group will unite to implement its three-year business plan (covering the period from April 2008 to March 2011) aimed at building a foundation for sustained medium- and long-term growth. We have positioned the year ending March 2011, the final year of the plan, as a polishing off year during which we will solidify our foundation for the next three-year plan aimed at getting the Group onto a growth trajectory. During the year, we will strive to expand sales in Japan while establishing an overwhelming presence in Asia, reflecting our focus on building a foundation for globalizing our operations. (For more details, please refer to (3) Issues to Address on pages 16-18.) On the revenue side, we expect a year-on-year increase in net sales. This forecast takes into account various factors, including expected bottoming out of the domestic market in the second half of the year, recovery sentiment in European and North American markets, and sales growth in Asian markets centering on China. On the earnings side, we expect operating income to increase year-on-year, mainly due to a marginal gain from the rise in revenue. Despite the expected increase in operating income, we predict that ordinary income will remain mostly unchanged. This is because of a rise in interest payments stemming from an increase in borrowings associated with the acquisition, completed in March 2010, of U.S.-based cosmetics firm Bare Escentuals, Inc. Despite improvements in extraordinary items, we forecast a year-on-year decline in net income, due to the absence of a decline in tax expenses enjoyed in the previous fiscal year. For the year, we forecast consolidated net sales of 660 billion (up 2.5% year-on-year), operating income of 53 billion (up 5.3%), ordinary income of 51.5 billion (mostly unchanged), and net income of 31 billion (down 7.9%). These forecasts do not include the results of Bare Escentuals, which became a subsidiary in March 2010. We are currently studying a number of aspects related to the acquisition, such as specification of assets acquired and liabilities assumed and calculation of market value. Once we have assessed the impact of such factors, we will swiftly revise and disclose our consolidated forecasts accordingly. Consolidated Net Sales Domestic Cosmetics Global Business Others Fiscal Year Ending Mar. 2011 (Estimate) 390.0 260.0 10.0 (Billions of yen) Fiscal Year Year-on-Year Increase/Decrease Ended Mar. 2010 (Results) Amount % change 383.8 +6.2 +1.6% 250.4 +9.6 +3.8% 10.0 0.0 0.3% Net Sales 660.0 644.2 +15.8 +2.5% Overseas Sales 248.0 237.5 +10.5 +4.4% Overseas Sales Ratio 37.6% 36.9% Note: Effective the fiscal year ending March 31, 2011, the Company will apply Accounting Standards Related to Disclosure of Segment Information. Accordingly, we will reclassify our business into three segments: Domestic Cosmetics Business, Global Business, and Other Businesses. Pursuant to this reclassification, the domestic professional business, previous included in the Domestic Cosmetics business segment, will move to the Global Business segment. We have used a simple accounting method to state our reclassified results for the year ended March 2010. 11
Consolidated Income Fiscal Year Ending Mar. 2011 (Estimate) Percent of Net Sales Fiscal Year Ended Mar. 2010 (Results) (Billions of yen) Year-on-Year Percent Increase/Decrease of Net Sales Amount % change Income from Operations 53.0 8.0% 50.4 7.8% +2.7 +5.3% Ordinary Income 51.5 7.8% 51.5 8.0% 0.0 0.0% Net Income 31.0 4.7% 33.7 5.2% 2.7 7.9% Consolidated Performance Indicators Fiscal Year Ending Mar. 2011 (Estimate) Fiscal Year Ended Mar. 2010 (Results) Year-on-Year Increase/Decrease Return on Equity 8.8% 9.8% 1.0% Net Income per Share (Yen) 77.94 84.62 6.68 Payout Ratio consolidated 64.2% 59.1% (plan) +5.1% Dividends per Share (Yen): Interim Year-End Outlook by Business Segment 25.00 25.00 25.00 25.00 (plan) Domestic Cosmetics In the year ending March 2011, we will concentrate on two pillars relationship building brands/lines and mega lines. Here, we will become increasingly meticulous in our efforts to match our fostered brands/lines and sales channels while honing our focus on core fields. (For more details, please refer to (3) Issues to Address on pages 16-18.) At the same time, we will strengthen our responsiveness to structured retailers and deploy our managerial resources while adopting optimal perspectives for each area. Although we expect the operating environment to remain difficult, we predict that sales in this segment will increase thanks to the aforementioned efforts. We also anticipate a rise in segment operating income owing mainly to a marginal gain from the sales increase. Global Business In China, we will expand the number of sales counters handling our products in department stores and reinforce our product lineup for that channel, while expanding our network of cosmetic specialty stores and adopting measures to boost sales at existing stores. We will also tap drugstores as a new channel and enter the professional business targeting beauty salons. Outside of China, we will seek to maintain growth by advancing our City Concept strategy, innovating the global brand SHISEIDO, strengthening the activities of beauty consultants, and cultivating new markets. (For more details, please refer to (3) Issues to Address on pages 16-18.) Overseas, we expect the tone of economic recovery to continue. We also look forward to sustained growth in Asia, with China serving as the driving force. In the year ahead, therefore, we forecast a year-on-year increase in global business sales in local-currency terms. Although we expect the yen to appreciate further compared with the year just ended, we believe we can post higher segment sales even in yen terms. On the earnings side, we forecast a year-on-year increase in segment operating income despite the negative impact of the yen s appreciation. 12
Others Going forward, we will continue striving to expand our presence in the frontier science division, which includes cosmetics raw materials, medical-use pharmaceuticals, chromatography, and cosmetics for medical institutions. For the segment, we forecast that sales and operating income will remain mostly unchanged. Overseas Sales We expect to maintain sales growth in Asia-Oceania, driven by China. In Europe and North America, as well, we anticipate economic recovery. On a local-currency basis, therefore, we expect total overseas sales to increase 9% year-on-year. We also forecast a year-on-year increase in yen terms despite the expected impact of the yen s appreciation. We base our predictions on the following assumptions. In the fiscal year ending March 2011, we expect Japan s real GDP to expand by around 1 2%. Based on Ministry of Economy, Trade and Industry statistics for cosmetics shipments, we estimate that domestic demand for cosmetics products will decline slightly. We base our forecasts on exchange rates of 90 per U.S. dollar, 120 per euro, and 13.5 per Chinese yuan. (2) Analysis of Financial Position Compared with the previous fiscal year-end (March 31, 2009), total assets increased 168.9 billion. This was mainly due to the acquisition of Bare Escentuals, Inc., which drove up investments and other assets. Total liabilities rose 155.6 billion as the Company made its 5th unsecured bond issue to finance the Bare Escentuals acquisition. Net assets increased 13.3 billion. Accordingly, the equity ratio at fiscal year-end was 44.9%, down 10.7 points from 55.6% a year earlier. Net cash provided by operating activities amounted to 69.4 billion. Net cash used in investing activities totaled 204.9 billion. This was mainly due to investments related to the Bare Escentuals acquisition, as well as construction of a new factory in Vietnam. Net cash provided by financing activities was 120.4 billion, due primarily to 120.8 billion in bank borrowings related to the Bare Escentuals acquisition. This was despite 20.0 billion in cash dividends paid and 6.8 billion in acquisition of treasury stocks. As a result, cash and cash equivalents at the end of the year amounted to 77.2 billion, down 14.7 billion from March 31, 2009. In the year we do not expect cash and cash equivalents to change significantly. In addition, we plan to undertake refinancing of the borrowings related to Bare Escentuals. Consolidated Cash Flows (Summary) (Billions of yen) Cash and Cash Equivalents at Beginning of Term 91.9 Net Cash Provided by Operating Activities Net Cash Used for Investing Activities 69.4 (204.9) *Investments in Fixed Assets (Billions of yen) [Investments in Fixed Assets] [(25.5)] Acquisition of Property, Plant, Net Cash Used for Financing Activities (120.4) and Equipment (15.5) Net Change in Cash and Cash Equivalents (14.7) Intangible Fixed Assets (4.7) Cash and Cash Equivalents at End of Term 77.2 Long-Term Prepaid Expenses (5.3) As below, for the past several years, the equity ratio has been above 50% based on book value. Due to a significant increase in total assets associated with the Bare Escentuals acquisition, however, that figure has fallen below 50%. Based on market value, the equity ratio declined to 95% in the previous fiscal year. Due to an increase in total market share value, however, this figure has returned to 100%. Liability-related indicators have also generally been maintained at a stable level despite being negatively affected by an increase in interest-bearing debt. 13
Cash Flow Indexes Fiscal Year Ended Mar. 2006 Fiscal Year Ended Mar. 2007 Fiscal Year Ended Mar. 2008 Fiscal Year Ended Mar. 2009 Fiscal Year Ended Mar. 2010 Equity Ratio (%) 55.7 52.5 56.6 55.6 44.9 Equity Ratio Based on Market Price (%) 134.4 133.6 157.6 95.0 104.1 Debt Repayment Term (Years) 3.8 1.8 0.8 1.5 3.1 Interest Coverage Ratio (Times) 8.6 30.6 39.1 23.6 45.4 Notes: 1. Equity ratio: (Net assets Stock acquisition rights Minority interests) Total assets Equity ratio based on market price: Market value of total stock Total assets Debt repayment term: Interest-bearing debt Operating cash flows Interest coverage ratio: Operating cash flows Payment of interest expenses 2. Each index is calculated based on consolidated financial figures. 3. Market value of total stock is calculated by multiplying the closing stock price at the end of the term by the number of shares outstanding at the end of the term (after deduction of treasury stock). 4. Interest-bearing debt refers to all liabilities listed in Consolidated Balance Sheets that incur interest. For payment of interest expenses, amounts shown in the Consolidated Statements of Cash Flows are used. (3) Basic Income Distribution Policy; Interim and Year-End Cash Dividends Our total shareholder return policy emphasizes maximizing returns to shareholders through direct means, in addition to generating medium- and long-term share price gains. To this end, our fundamental policy is deploy to growth-oriented strategic investments to drive increases in earnings and improvements in capital efficiency, which will lead to medium- and long-term increases in dividends and higher share prices. Going forward, our medium-term profit return objective is to achieve a consolidated dividend payout ratio of 40%. To this end, we will prioritize payment of stable dividends while implementing share buybacks in a flexible manner. Previously, our profit return policy included a 60% target for total return ratio, which represents the amount of profits returned to shareholders the sum of dividends paid and share buybacks as a proportion of consolidated net income. For the past several years, this policy has enabled us to establish a position as a global player and raise the quality of our operations. Due to the absence of major growth investment projects to date, we have sought to achieve this target by actively returning more than half of net income (60%) to shareholders while giving due consideration to improving return on equity. In light of our next three-year plan, which aims to position the Group into a growth trajectory, we will pursue more aggressive growth strategies, including the acquisition of Bare Escentuals. For this reason, from the year ending March 2011 we have shifted to a policy of allocating more than half of net income to growth investments. In addition, we have decided on the dividend payout ratio as the numerical target for our profit return policy in order to raise the certainty of shareholder return, while excluding uncertain elements, such as flexible share buybacks done on an ad hoc basis. The Company plans to declare a year-end cash dividend of 25.00 per share, as originally planned. Coupled with the 25.00 interim dividend, this will bring total annual dividends to 50.00 per share. The dividend payout ratio, therefore, will be 59.1% on a consolidated basis. In the fiscal year ending March 2011, we plan to pay interim and year-end dividends of 25.00 per share each, for total annual dividends of 50.00. 14
(4) Business and Other Risks Business and other risks that could potentially affect the Shiseido Group are described in its most recent Financial Report (filed on June 24, 2009). Since there are no major changes, that section has been omitted from this report. (Shiseido Website) http://www.shiseido.co.jp/e/ir/annual/e0806anu/img/anu00001.pdf 2. The Shiseido Group For details about major changes in subsidiaries, please refer to 1. Scope of Consolidation on page 26. All other details are described in our most recent Financial Report (filed on June 24, 2009). Since there are no major changes, those sections have been omitted from this report. (Shiseido Website) http://www.shiseido.co.jp/e/ir/annual/e0806anu/img/anu00001.pdf 3. Management Policies (1) Basic Corporate Policies Since its establishment in 1872, Shiseido has consistently modeled its corporate management on the spirit of contributing to the beauty and health of numerous customers, thus benefiting them and society in general. Based on this spirit, we will seek to remain a company that makes a lasting contribution to customers around the world. Underscoring this basic policy is our commitment to earning the support of our various stakeholders customers, business partners, shareholders, employees, and society in general as a valuable corporation in the belief that creating value together improves corporate value in the long term and helps maximize shareholder value. Improving the value of the Shiseido Group in the 21st century will crucially depend on how we fulfill our social responsibilities as a corporation and how we address environmental issues, in addition to raising our economic value. (2) Medium- and Long-Term Management Strategies and Numerical Management Targets The Shiseido Group is implementing its three-year business plan (covering the period from April 2008 to March 2011), designed to raise the quality of all its activities. Under the plan, the Group seeks to become a global player representing Asia with its origins in Japan. Under the plan, we will continue striving to increase our growth potential and profitability, as we did during the previous three-year plan. At the same time, we will create a brand loved by customers throughout the world through the pursuit of three initiatives: globalization, distinction and concentration, and utilization of external knowledge and resources. In addition, we will establish an unsurpassed, world-class quality of business management. Under our three-year plan, we are targeting an overseas sales ratio of 40% or higher, an operating margin of 10% or higher, and an ROE that is one to two points higher than the operating margin. Given the impact of the global economic recession, however, we concluded at the end of fiscal 2008 that these targets would be difficult to achieve. Therefore, we will strive achieve our numerical targets at the earliest possible time in the next three year plan (covering the period from April 2011 to March 2014). Meanwhile, the strategies of our three-year plan remain unchanged. 15
(3) Issues to Address Three-year plan Shiseido will continue implementing its three-year plan, which is aimed at raising the quality of all its activities. Under the plan, we are pursuing our vision of becoming a global player representing Asia with its origins in Japan. Our aim is to create a brand loved by customers throughout the world by building on the three strengths (core values) of the SHISEIDO brand: richness, human science, and spirit of Omotenashi (hospitality). In the process, we will and establish an unsurpassed, world-class quality of business management. Strength of the Shiseido Brand (Core Values) Richness Being thoroughly meticulous about ensuring high quality of products and services Human science Not only making the skin beautiful, but also pursuing benefits that reach all the way to people s minds within the R&D field Spirit of Omotenashi (hospitality) Enriching people s hearts through interaction between customers and products Strategies for year ahead Due to the global economic recession that began in the latter half of 2008, market conditions in Japan remain uncertain, but we are beginning to see positive signs overseas. We have positioned the year ending March 2011, the final year of the plan, as a polishing off year during which we will solidify our foundation for the next three-year plan aimed at getting the Group onto a growth trajectory. During the year, we will strive to establish an overwhelming presence in Asia, reflecting our focus on building a foundation for globalizing our operations. Demonstrating our Japanese origins In the fiscal period ending March 2011, we will continue our core focus on fostering our relationship building brands/lines and mega lines, in order to create hit products that attract and retain loyal followers and produce long-selling items. At the same time, we will prepare to address structural changes in the market, highlighted by ongoing polarization. Reflecting the purchasing patterns of customers, we have assorted our channels and brands into three categories high-value-added counseling, spot counseling, and self-selection and we will relentlessly pursue the most effective sales techniques for each category. Meanwhile, we will increase the number of cosmetics specialty stores targeted by our PS Program, implement a double counter strategy at department stores, and strengthen the responsiveness of beauty consultants at general merchandising stores. For drugstores, we will adopt a focused response to major drugstore chains. To further reinforce these initiatives, we have reassessed our channel-specific sales system, and in April 2010 we reorganized the system to facilitate market adaptation from both area and affiliation perspectives. 16
Area High-value-added counseling (Target customers: Value-conscious people who desire optimal products for their own needs; Sales technique: Deploy human resources to convey value) Spot counseling (Target customers: People who are highly conscious of trends in cosmetics; Sales technique: Mass advertising and one-point advice) Self-selection (Target customers: Price-conscious people who select their own products; Sales technique: Information transmission at store) Channels and Brands Channels: Cosmetics specialty stores, department stores, general merchandising stores Brands: High-priced counseling products centered on relationship building brands/lines Channels: Drugstores Brands: Mid-priced counseling products centered on mega brands (Maquillage, Elixir) Channels: Drugstores, self-selection sections of general merchandising stores Brands: Low-priced self-selection items and toiletries (Aqua Label, Integrate, TSUBAKI, Uno) Representing Asia Seeking to build a sustainable growth foundation in Asia, we will target steady sales growth in the prestige market. In the expanding masstige market, meanwhile, we will reinforce our sales base for existing brands, such as Za and Majolica Majorca. In Japan, we will prepare for a full-scale rollout tailored to the low-priced market segment. Consistent with these initiatives, in April 2010 we commenced operation of a new plant in Vietnam, to serve as an important production and shipment base supporting our masstige strategy in Asia. In China, which we regard as a growth engine for our business, we will target continued strong growth. In Chinese department stores, we will reinforce the in-store responsiveness of beauty consultants. We will also seek to expand sales of the global brand SHISEIDO and the dedicated China brand AUPRES, centering on high-end department stores. For cosmetics specialty stores, we will improve our responsiveness by utilizing customer data collected via Urara, a dedicated brand for Chinese cosmetic specialty stores. In March 2010, meanwhile, we began entered the drugstore channel with the launch of the DQ skincare brand. This represents our third sales channel in China after department stores and cosmetics specialty stores. Also in the same month, we entered the professional market, targeting high-end beauty salons in Beijing and Shanghai. Going forward, we will strive for market proliferation of our professional brands for hair salons: SHISEIDO Professional and JOICO. Becoming a global player We will seek to become a global multi-brand company that promotes multiple large-scale brands, centering on the global brand SHISEIDO. With respect to the global brand SHISEIDO, we will expand the number of stores incorporating our new global counter. Following the launch of a premium skincare line, called SHISEIDO Future Solution LX, in March 2010, we will also strengthen our lineup of skin-lightening and anti-aging products. Meanwhile, we will target further progress of our City Concept strategy in Europe and North America. We will also focus on implementing this strategy in Asia, where major cities have high influence and markets are expected to grow in the future. Going forward, we will actively enter new markets according to the specific attributes of each. In markets where we sell our products via sales agencies, we will seek to undertake direct sales through sales subsidiaries. Together with Bare Escentuals, which we recently acquired, we will initiate collaborative projects and study specific ways to maximize synergistic benefits. We will also deploy our skincare-related R&D capabilities a key strength of the Shiseido Group and our sales bases in Japan and elsewhere in Asia. In Europe and North America, meanwhile, we will further strengthen sales via television shopping, over-the-counter, and the Internet. 17
Actively promote environmental protection and CSR activities The original meaning of the Shiseido name is to appreciate the Earth s blessings and use them to create new levels of value. Based on this, we are thankful for the limited resources of this planet and regard it as our mission to protect such resources and pass them on to the next generation. Seeking to propose innovative lifestyles in which environment and beauty coexist, we will continue promoting the Shiseido Earth Care Project, an environmental initiative involving all Group employees. This project focuses on three areas: cutting carbon dioxide emissions, saving resources, and protecting biodiversity. Another key CSR initiative is our Life Quality Beauty Program. Here, we will undertake product development and strengthen alliances with medical institutions in order to address the skin-related anxieties that many people have. In the year under review, we held around 3,000 beauty-related seminars in aged-care welfare and other facilities. We will broaden the scope of this initiative to cover more facilities, and we will expand activities overseas, including by increasing the number of regions targeted. To become a global player representing Asia with its origins in Japan, the Shiseido Group will continue raising the quality of all its activities. In this way, we will create a brand loved by customers throughout the world and establish an unsurpassed, world-class quality of business management. In the fiscal year ending March 2011, we will finish off our current three-year plan aimed at raising the quality of all our activities. During the year, we will unite in an effort to build a firm footing for getting the Group onto a growth trajectory toward globalization over the subsequent three-year period. 18
4. Consolidated Financial Statements (1) Consolidated Balance Sheets 19 March 2009 March 2010 ASSETS Current Assets: Cash and Time Deposits 57,411 70,101 Notes and Accounts Receivable 102,019 111,796 Short-Term Investments in Securities 47,343 24,723 Inventories 68,330 67,342 Deferred Tax Assets 26,228 28,389 Other Current Assets 16,696 16,939 Less: Allowance for Doubtful Accounts (1,034) (1,050) Total Current Assets 316,995 318,241 Fixed Assets: Property, Plant and Equipment: Buildings and Structures 161,018 157,281 Accumulated depreciation (92,670) (95,191) Buildings and Structures (net of depreciation) 68,348 62,089 Machinery, Equipment and Vehicles 81,888 82,938 Accumulated Depreciation (70,287) (72,112) Machinery, Equipment and Vehicles (net of depreciation) 11,601 10,826 Fixtures and Fittings 47,002 50,434 Accumulated Depreciation (33,333) (36,061) Fixtures and Fittings (net of depreciation) 13,668 14,373 Land 38,184 35,274 Leased Assets 10,839 11,094 Accumulated Depreciation (5,545) (5,196) Leased Assets (net) 5,294 5,898 Construction in Progress 1,136 4,322 Total Property, Plant and Equipment 138,232 132,784 Intangible Assets: Goodwill 12,197 11,852 Lease Assets 208 371 Other Intangible Assets 22,999 23,612 Total Intangible Assets 35,405 35,837 Investments and Other Assets: Investments in Securities 33,929 192,142 Prepaid Pension Expenses 34,359 28,740 Long-Term Loans Receivable 17,476 Long-Term Prepaid Expenses 11,313 10,326 Deferred Tax Assets 12,092 14,163 Other Investments 24,466 25,896 Less: Allowance for Doubtful Accounts (227) (164) Total Investments and Other Assets 115,934 288,581 Total Fixed Assets 289,572 457,203 Total Assets 606,568 775,445
March 2009 Millions of yen) March 2010 LIABILITIES Current Liabilities: Notes and Accounts Payable 52,713 44,320 Short-Term Debt 3,709 105,966 Commercial Paper 819 Bonds Redeemable within One Year 20,000 Current Portion of Long-Term Borrowings 800 4,273 Lease Obligations 2,273 2,453 Accrued Amount Payable 47,005 46,988 Accrued Income Taxes 5,306 10,277 Reserve for Sales Returns 11,061 11,821 Accrued Bonuses for Employees 9,563 11,320 Accrued Bonuses for Directors and Corporate Auditors 119 317 Provision for Liabilities and Charges 633 1,025 Deferred Tax Liabilities 8 21 Other Current Liabilities 20,082 22,725 Total Current Liabilities 174,097 261,512 Long-Term Liabilities: Bonds 50,000 Long-Term Borrowings 31,110 47,779 Lease Obligations 3,340 3,974 Accrued Retirement Benefits 39,271 40,130 Allowance for Loss on Guaranties 350 350 Allowance for Environmental Measures 499 Deferred Tax Liabilities 3,821 3,381 Other Long-Term Liabilities 2,625 2,611 Total Long-Term Liabilities 80,519 148,725 Total Liabilities 254,617 410,237 NET ASSETS Shareholders Equity: Common Stock 64,506 64,506 Capital Surplus 70,258 70,258 Retained Earnings 245,544 259,063 Less: Treasury Stock (16,839) (23,111) Total Shareholders Equity 363,469 370,717 Valuation, Translation Adjustments and Others: Unrealized Gains on Available-for- Sale Securities, Net of Taxes 353 1,054 Foreign Currency Translation Adjustments (26,599) (23,447) Total Valuation, Translation Adjustments and Others (26,245) (22,393) Stock Acquisition Rights 255 430 Minority Interests in Consolidated Subsidiaries 14,471 16,453 Total Net Assets 351,951 365,207 Total Liabilities and Net Assets 606,568 775,445 20
(2) Consolidated Statements of Income March 2009 March 2010 Net Sales 690,256 644,201 Cost of Sales 171,752 160,166 Gross Profit 518,503 484,035 Selling, General and Administrative Expenses 468,589 433,684 Operating Income 49,914 50,350 Other Income Interest Income 2,108 831 Dividend Income 712 684 Equity in Earnings of Affiliates 57 61 Rental Income 717 Subsidy Income 479 Others 2,839 1,575 Total Other Income 5,718 4,350 Other Expenses Interest Expense 1,812 1,569 Sales Discounts 412 Foreign Exchange Loss 274 3 Other 1,070 1,643 Total Other Expenses 3,570 3,215 Ordinary Income 52,061 51,485 Extraordinary Income Gain on Sales of Property, Plant and Equipment 519 254 Gain on Revaluation of Investments in Securities 35 198 Gain on Sales of Shares in Affiliates 71 Total Extraordinary Income 626 453 Extraordinary Losses Impairment loss 6,072 3,469 Loss on Disposal of Property, Plant and Equipment 1,403 718 Loss on Sales of Investments in Securities 12 36 Loss on Revaluation of Investments in Securities 186 356 Loss on Revaluation of Capital Subscriptions 19 Restructuring Expense 6,073 Effect of Application of Accounting Standards for Leased Assets 215 Loss on Cancellation of Lease Obligations 218 112 Environmental Expenses 507 Total Extraordinary Losses 14,201 5,199 Income before Income Taxes 38,486 46,739 Income Taxes Current 12,027 14,659 Income Tax Deferred 3,108 (5,166) Total Income Taxes 15,136 9,492 Minority Interests in Earnings of Consolidated Subsidiaries 3,976 3,575 Net Income 19,373 33,671 21