Annual Report 2009 [PDF:2.7MB]
Transcription
Annual Report 2009 [PDF:2.7MB]
Shiseido commenced operations as Japan’s first Western-style pharmacy in Tokyo’s Ginza district in 1872. The name Shiseido derives from a Chinese expression meaning “praise the virtues of the great Earth, which nurtures new life and brings forth new values.” In line with this expression, our founding spirit of “serving our customers and contributing to society by integrating all things on Earth to create new value” lives on in our corporate mission of “We seek to identify new, richer sources of value and use them to create a beautiful lifestyle.” This policy has led to high-value products and services in the cosmetics and other businesses promoting people’s beauty and well-being. Shiseido will advance reforms and continue to “improve quality of activities across the board” under the Three-Year Plan to “become a global player representing Asia with its origins in Japan.” By successfully implementing these reforms, we aim to assist society, customers and all people in experiencing “This moment. This life. Beautifully.” Contents Financial Highlights ············································ 4 Shiseido at a Glance ············································ 6 Financial Section ·················································· 39 Six-Year Summary of To Our Stakeholders ··········································· 8 Selected Financial Data ····························· 40 An Interview with President Maeda ················· 9 Management’s Discussion and Analysis ····· 41 Business Review Domestic Cosmetics Business ····················· 14 Overseas Cosmetics Business ······················ 18 Feature: Shiseido’s Strengths in China ··········· 22 Corporate Governance ········································ 28 Contributing to Society ······································· 32 Environmental Initiatives ··································· 34 Board of Directors, Corporate Auditors and Corporate Officers ············································ 36 Main Subsidiaries and Affiliates························ 38 Consolidated Financial Statements ·············· 54 Notes to the Consolidated Financial Statements ·································· 59 Independent Auditors’ Report ······················· 75 Investor Information············································ 76 Corporate Information ········································ 77 Forward-Looking Statements In this annual report, statements other than historical facts are forward-looking statements that reflect the Company’s plans and expectations. These forward-looking statements involve risks, uncertainties and other factors that may cause actual results and achievements to differ from those anticipated in these statements. Financial Highlights Shiseido Company, Limited, and Subsidiaries For the years ended March 31, 2007, 2008 and 2009 ● Net sales decreased 4.6 percent to ¥690.3 billion due in part to a decline in domestic sales caused by cooling consumer sentiment in Japan and overseas and the impact of the strong yen on otherwise solid overseas sales. ● Despite the progress of cost reductions, operating income decreased 21.4 percent to ¥49.9 billion due to a significant decrease in gross profit resulting from the decrease in net sales. As a result, operating margin decreased 1.6 percentage points to 7.2 percent. ● Return on equity decreased 3.8 percentage points to 5.4 percent. ● Cash dividend per share for the fiscal year increased ¥16.0 to ¥50.0. Millions of yen (Except per share data) Percent change Thousands of U.S. dollars (Note 1) (Except per share data) 2009/2008 2009 2007 2008 2009 Net sales ········································ ¥694,594 ¥723,485 ¥690,256 Operating income ···························· 50,005 63,465 49,914 – 21.4 507,979 Net income ····································· 25,293 35,460 19,373 – 45.4 197,161 Total assets ···································· ¥739,833 ¥675,864 ¥606,569 Net assets ······································ 403,797 399,739 351,951 Net income (Note 2) ························ ¥ 60.9 ¥ 86.1 ¥ 48.0 Net assets (Note 2)·························· 940.8 946.2 839.9 – 11.2 8.55 Cash dividend ································· 32.0 34.0 50.0 +47.1 0.51 Operating Results: – 4.6% $7,024,791 Financial Position: –10.3% $6,173,102 –12.0 3,581,834 Per Share Data (In yen and U.S. dollars): – 44.3% $0.49 Financial Ratios: Operating profitability ······················ 7.2% 8.8% 7.2% Return on equity······························ 6.6 9.2 5.4 Total return ratio (Note 3) ················· 52.6 108.8 127.2 Notes: 1. All dollar amounts herein refer to U.S. currency. Yen amounts have been translated, solely for the convenience of the reader, at the rate of ¥98.26 to US$1 prevailing on March 31, 2009. 2. Net income per share (basic) is calculated based on the weighted average number of shares outstanding during each respective year. Net assets per share is calculated based on the number of shares outstanding at the end of each respective year. 3. Total return ratio = (Cash dividends + Share buybacks*) ÷ Consolidated net income *Excluding odd-lot purchases Please refer to page 40 for an in-depth six-year summary of selected financial data. 4 SHISEIDO ANNUAL REPORT 2009 Net Sales Operating Income / Operating Profitability (Billions of yen) (Billions of yen) 694.6 639.8 671.0 723.5 Net Income (Loss) (%) 63.5 (Billions of yen) 35.5 690.3 49.9 50.0 38.9 19.4 8.8 7.2 25.3 7.2 14.4 5.8 26.5 4.1 (8.9) 05 06 07 08 05 09 06 07 Operating Income Return on Equity (%) 08 09 05 06 07 08 09 Operating Profitability Net Income (Loss) per Share Cash Dividends per Share (Yen) (Yen) 86.1 9.2 50.0 60.9 6.6 48.0 5.4 34.4 30.0 32.0 34.0 06 07 08 24.0 3.9 (21.5) (2.4) 05 06 07 08 09 05 06 07 08 09 05 Business Segment Information (Year ended March 31, 2009) Geographic Segment Information (Year ended March 31, 2009) Overseas Sales / Overseas Sales Ratio Net Sales (Outer circle) Operating Income (Inner circle) Net Sales (Outer circle) (Billions of yen) 2.5 (%) 37.8 30.3 15.9 14.5 59.7 36.5 32.4 (%) 66.7 7.3 35.9 29.4 27.5 39.4 62.3 175.7 Overseas Cosmetics Business Others 38.0 264.3 262.0 08 09 224.8 197.2 17.7 7.0 05 Domestic Cosmetics Business (%) Operating Income (Inner circle) 3.0 09 06 Japan Americas Americas Europe Asia/Oceania Europe 07 Asia/Oceania Overseas Sales Ratio Note: 1. Segment sales represent sales to external customers only and do not include intersegment sales or transfers. 2. Segment operating income does not include eliminations/corporate. SHISEIDO ANNUAL REPORT 2009 5 Shiseido at a Glance Domestic Cosmetics Business Net Sales (Billions of yen) 447.6 439.0 Share of total net sales 59.7% The domestic cosmetics business segment handles products/ services for the Japanese market, primarily cosmetics. The core cosmetics division manufactures and markets cosmetics, cosmetics equipment and toiletries. The professional division manufactures and markets products/services for hair and beauty salons. The healthcare division manufactures and markets health and beauty foods and over-the-counter drugs. The non-Shiseido and mail-order division manufactures and markets cosmetics that are not branded as Shiseido products. 07 08 412.3 09 Cosmetics Counseling clé de peau BEAUTÉ Elixir Prior Maquillage Self-selection Toiletries Aqua Label Integrate Professional Renascent Bénéfique Uno Tsubaki Healthcare Qi The Collagen Sengan Senka Non-Shiseido and Mail-Order Ferzea Dicila Soka-Mocka Others Share of total net sales 2.5% The others business segment includes the frontier sciences division, which manufactures and markets cosmetic raw materials, medical-use drugs and beauty care cosmetics, and conducts a variety of other activities including restaurant operation. Notes: Segment sales represent sales to external customers only and do not include intersegment sales or transfers. 6 SHISEIDO ANNUAL REPORT 2009 Overseas Cosmetics Business Net Sales (Billions of yen) Composed of the cosmetics division and the professional division, the overseas cosmetics business segment handles products for overseas markets. It manufactures and markets cosmetics and other products/services in the Americas, Europe and Asia/Oceania. Share of total net sales 224.3 263.7 260.9 37.8% 07 Cosmetics 08 09 Professional Global brand SHISEIDO White Lucent SHISEIDO Future Solution LX SHISEIDO Perfect Rouge DECLÉOR ISSEY MIYAKE NARS CARITA URARA PURE & MILD JOICO Non-Shiseido Jean Paul GAULTIER China AUPRES Net Sales (Billions of yen) 22.7 20.8 17.0 07 08 09 Bio-hyaluronic acid Shiseido Parlour SHISEIDO ANNUAL REPORT 2009 7 To Our Stakeholders In fiscal 2008, the year ended March 2009, sales and income decreased due to factors including worsening market conditions. However, we will assiduously resolve the issues highlighted by the challenging operating environment and step up distinction and concentration to improve the quality of activities across the board. Shiseido is moving forward with the goal of being a company that earns the suppor t of all stakeholders as it works to increase corporate and shareholder value. In 2008, Shiseido announced its goal to become a global player representing Asia with its origins in Japan in 10 years, and the aggressive growth strategies and reforms it would implement to do so. In line with the objectives we set for our new Three-Year Plan, in the year ended March 2009, the first year of the plan, we worked to improve quality of activities across the board while accelerating globalization and distinction and concentration to optimize the allocation of resources from a worldwide perspective. However, Shiseido’s performance during the year was impacted by factors such as the global economic slowdown and rapid cooling of consumer sentiment. Unfortunately, the result was lower sales and income. Behind the decrease in domestic sales were not only the deteriorating market conditions but also dramatic changes in the environment that highlighted the unique issues that Shiseido must address. Going forward, we forecast that the external environment will remain challenging, but we will overcome the challenges we face, and by stepping up distinction and concentration we will enhance our ability to generate strong growth in the future. At the same time, we will raise cost efficiency even further in working to increase our operating margin. Faced with challenging times, we will not be distracted by short-term pressures. Rather, we will proceed steadily toward our objectives. At the same time, we will resolutely re-examine our mission vis-à-vis society and move forward with the aim of being a company that earns the support of all stakeholders as we work to increase corporate and shareholder value. Shiseido’s medium-term target for the total return ratio, which is the sum of dividends and share buybacks divided by consolidated net income, is 60 percent. The Company will continue to flexibly buy back and retire treasury stock while emphasizing stable cash dividends. We look forward to the continuing support of our valued shareholders. June 24, 2009 SHINZO MAEDA President & CEO (Representative Director) 8 SHISEIDO ANNUAL REPORT 2009 An Inter view with President Maeda Shiseido aims to become a global player representing Asia with its origins in Japan, and is promoting improved quality of activities across the board under its Three-Year Plan that started in the year ended March 2009. In Japan, we will sharpen our focus on reducing the number of core brands/lines and retail outlets in each of our channels to step up distinction and concentration. Overseas, we will cultivate the global brand and continue working to further strengthen our business base in Asia. SHISEIDO ANNUAL REPORT 2009 9 Overview of the Year Ended March 2009 Against a backdrop of cooling consumer sentiment, the Sales and income decreased due to the domestic over-the-counter cosmetic market decreased impact of the rapidly worsening external an estimated 2 to 3 percent overall. However, the environment. What is your overall view of decrease in sales in Shiseido’s domestic cosmetics busi- the first year of the Three-Year Plan? ness exceeded the contraction of the overall market. Simply put, the past fiscal year highlighted the issues we must address. During the year ended March 2009, the first year of the Three-Year Plan, we concentrated on creating a brand loved by customers throughout the world. We also strengthened the global brand and deployed our expertise to develop The sharp deterioration of the market environment has revealed underlying structural issues in the domestic cosmetics business, and we realize that future growth is contingent upon resolving these issues. The Three-Year Plan business in Asia. In our home market of Japan, we Has Shiseido changed its vision and the focused on cultivating core brands/lines. Moreover, we Three-Year Plan due to the changing market promoted reform of our profit structure and raised environment? What policies will guide organizational capabilities, cultivated human resources Shiseido in the future? and strengthened corporate governance in working to In line with the Three-Year Plan, we aim to become a establish an unsurpassed, world-class quality of busi- global player representing Asia with its origins in Japan and ness management. will promote improved quality of activities across the However, despite devoting all of our strengths to board. Our goal is to “realize the beauty of customers these corporate activities, we were affected by the global and enrich their hearts to complement their outer beauty.” economic slowdown. Market conditions kept us from To ensure that customers around the world recognize achieving the full benefit of reforms continuing from our mission, we will hone our three strengths: richness, the previous three-year plan. human science, and spirit of omotenashi (hospitality). The deteriorating economic environment has a par- Based on these core strengths, we will continue working on ticularly strong impact on our performance in Japan. two tasks: creating a brand loved by customers throughout Net sales decreased 4.6 percent year on year, and oper- the world and establishing an unsurpassed, world-class ating income decreased 21.4 percent year on year. quality of business management. Under the Three-Year Plan, our targets for the year ending March 2011 are an overseas sales ratio of 40 percent or higher, an operating margin of 10 percent or higher and return on equity that is 1 to 2 percentage points above the operating margin. However, the global financial crisis has been worse than expected, and we do not see market conditions recovering until after the year ending March 2011. We will move forward without changing our management vision or our Three-Year Plan, and we will do the best we can to achieve the targets as soon as possible during the next three-year plan that will begin in the year ending March 2012. 10 SHISEIDO ANNUAL REPORT 2009 An Inter view with President Maeda Issues in the Domestic Cosmetics Business sales and support activities were not sufficient to achieve Why was the domestic cosmetics busi- results in the recession. In marketing, we have strengthened our portfolio of ness so challenging during the year ended brands/lines by establishing the two pillars of mega March 2009? lines and relationship-building brands/lines. However, During the year ended March 2009, we nurtured the large-scale promotions cutting across brands/lines existing brands/lines centered on mega lines1 and con- and channels that we have traditionally executed have centrated on strengthening our relationship-building proven to be unsuited to the current environment. In brands/lines.2 However, apart from solid results for sales counter creation and sales activities, Shiseido’s those we promoted heavily, our brands/lines generally organization may not yet be strong enough to consis- struggled. tently succeed in securing retail shelf space, for which Looking at our products by price point and channel, competition is intense, particularly at structured retail- Shiseido’s mid-priced counseling cosmetics and low- ers. In value creation, although we have made our manu- priced self-selection cosmetics struggled given the facturing system more customer-oriented, our efforts to growing market trend toward low-priced items. In the develop and communicate information regarding prod- high-priced cosmetics market, which has consistently uct value were not consistently sufficient to induce cus- performed well, sales were below expectations. tomers to select Shiseido products. An analysis of these results shows that promotion, Ten-Year Roadmap Sustained growth as a global player representing Asia with its origins in Japan Three-Year Plan Previous Three-Year Plan Phase 1 Establish foundation Improve quality of as a global player activities across the board Establish foundation FY2005 Phase 3 Make a leap forward Phase 2 Get into growth trajectory Become a global player Establish an undisputed presence in Asia FY2008 FY2011 FY2014 FY2017 FY2017: Net sales in excess of ¥1 trillion (over 50% overseas sales); Consistently generate solid operating margins (12% or higher); ROE comparable to that of global competitors (15% or higher) Overview of Three-Year Plan Become a global player representing Asia with its origins in Japan; Improve quality of activities across the board Keywords Expand growth potential and improve profitability Globalization Utilization of external knowledge and resources Distinction and concentration Create solid brands Improve quality of business management Strategic direction Strengthen cultivation of the global brand Nurture human resources on global basis Establish an undisputed presence in Asia Raise organizational capabilities ・Full-scale rollout of “masstige” marketing ・Further expand business in China ・Solidify No.1 position in Japan Advance corporate governance Strengthen foundation for raising the Shiseido Group’s corporate value Pursue structural reforms ・Accelerate innovation of Beauty Consultant activities ・Reinforce value creation power ・Establish global production systems Target proactive CSR initiatives Strengthen global solidarity SHISEIDO ANNUAL REPORT 2009 11 In the year ending March 2010, we intend to resolve department store channel. In the cosmetics specialty these issues as soon as possible, because doing so is store channel, we will expand the number of stores and sure to boost Shiseido’s competitiveness. Our present promote policies to increase sales at existing stores. difficulties are an opportunity to move one step closer to Fortifying Shiseido’s Business Base in the attaining the ideal corporate form we are aiming for. Year Ending March 2010 Initiatives in the Year Ending March 2010 How does Shiseido plan to establish What are Shiseido’s initiatives in the year unsurpassed, world-class quality of busi- ending March 2010? ness management, which is a key theme We forecast that the challenging market environment of the Three-Year Plan? will continue in the domestic cosmetics market. Our To achieve sustained growth, Shiseido must work main priority is therefore executing our distinction and diligently to build a high-quality global management concentration strategy even more thoroughly. Mega foundation. We will enhance profitability by conducting lines and relationship-building brands/lines will continue ongoing production process improvements and other to be the two pillars of Shiseido’s brand strategy. We efforts to optimize our supply chain. At the same time, we will match brands/lines and channels even more pre- will reduce costs by implementing other structural cisely than in the past to achieve distinction and concen- reforms such as modifying our materials-ordering sys- tration by narrowing down our core fields and then con- tem. The Shiseido Group will also work to set up a system centrating management resources in them. In addition, we that attracts the most suitable people for the most suitable will reinforce our basic sales process, including our roles by removing barriers related to age, gender, and shelf-space procurement capabilities and our ability to nationality. We will also move to further enhance man- create sales counters. We will also work to upgrade our agement transparency and objectivity while clarifying product information and sales counter activities with an authority and responsibility by continuously strengthening emphasis on market competitiveness. corporate governance. In the overseas cosmetics business, we will position Moreover, we will step up our environmental and Shiseido as a company that represents Asia and pro- CSR activities. In the year ending March 2010, we mote a strategy of ranking among the top global com- launched the Shiseido Earth Care Project, an envi- petitors. We will reinforce the global brand , ronmental initiative in which all Group employees will which is the symbol of the Shiseido Group, to further participate. In April 2009, we gave our program for enhance its presence as a prestige brand. In addition, contributing to society through beauty a new name, Concept,3 a Life Quality Beauty Program, in tandem with global key strategy for overseas business under the Three- expansion of activities. At the same time, we implemented Year Plan. We will also aggressively develop business in a system under which Shiseido employees and retirees emerging markets. In Asia, we will conduct promotional give beauty seminars in elderly care and other facilities. I activities across the entire region, with an emphasis on sometimes participate in seminars and put lipstick on “anti-aging” and “skin-brightening” products, in which elderly people, which makes them happy. Every time I par- the Shiseido Group is strong. We will also enhance ticipate in seminars, I realize that they do not just con- we will continue to promote our core City “masstige” 4 business. In tribute to society, but also enable us to reaffirm the China, we will maintain a high rate of growth by power of cosmetics and beauty. They inspire our efforts by strengthening our presence in the makeup field in the reminding us of the significance of the cosmetics business efforts to fully develop the 12 SHISEIDO ANNUAL REPORT 2009 An Inter view with President Maeda and the happiness that comes from being involved in it. With this in mind, we will keep moving forward so that people will continue to trust and select Shiseido worldwide. Please see pages 28 to 31 for more detail on corporate governance, pages 32 to 33 for more detail on CSR and pages 34 to 35 for more detail on environmental activities. Shareholder Returns Shiseido increased the total cash dividend per share by ¥16.00 to ¥50.00, as per its forecast at the beginning of the fiscal year, and the payout ratio exceeded 100 percent. Please explain Shiseido’s dividend policy going forward. Message to Shareholders and Investors Our basic policy for shareholder returns will continue Please conclude by giving shareholders to be a target total return ratio of 60 percent over the and investors a summary of Shiseido’s medium term, meaning that we will use 60 percent of future role. consolidated net income for the dividend and share buybacks. With an emphasis on a stable total cash dividend, we will also continue to buy back and retire treasury stock while taking account of changes in the stock market. Although income was below the level initially planned in the Three-Year Plan, we emphasized stable shareholder returns with a total cash dividend per share of ¥50.00 for the year ended March 2009, and we expect to maintain the total cash dividend per share at that amount for the year ending March 2010. In addition, in May 2009 we bought back 4 million shares of stock valued at about ¥6.8 billion. As a result, we project that the total return ratio for the year ending 2010 will be 80 percent. The operating environment ahead will remain challenging, but it presents the perfect opportunity to improve the quality of activities across the board. The difficult times we now face are a strong reminder of the importance of re-examining our mission vis-à-vis society. The unique strength that sets Shiseido apart from other global players is our commitment to “realize the beauty of customers and enrich their hearts to complement their outer beauty.” Shiseido will deal rapidly and flexibly with its changing environment, with the ongoing aim of becoming a global player representing Asia with its origins in Japan. We are counting on the continued support of shareholders and investors as we implement further reforms. ■ Dividend and Total Return Ratio (¥) Dividend Total Return Ratio 50 105.1 30 127.2 (%) 50 108.8 34 32 80.0 2. Relationship-building brands/lines: Brands/lines that deepen relationships with customers through counseling. 24 52.6 05 1. Mega lines: Lines aimed at expanding points of contact with customers, in which Shiseido concentrates advertising and sales promotion by skincare and makeup category in order to attain category leadership. 06 07 3. City Concept: A strategy in which the world’s major markets are considered as city-based rather than country-based units, and marketing is concentrated in target cities. 08 09 10 4. Masstige: Coined word from “mass” and “prestige.” Masstige products are positioned as more expensive than mass-produced products, but more moderately priced than prestige products. (Forecast) SHISEIDO ANNUAL REPORT 2009 13 Business Review Domestic Cosmetics Business In the domestic cosmetics business, we will promote further distinction and concentration in brand strategy while innovating sales and Beauty Consultant activities in order to firmly secure the number one position in Japan. Net Sales Operating Income (Billions of yen) Sales by Division Non-Shiseido and Mail-Order 8.2% (Billions of yen) 445.3 453.4 447.6 439.0 43.1 412.3 34.3 36.9 Healthcare 3.6% 33.0 25.5 05 06 07 08 09 05 06 07 08 09 Professional 3.6% Toiletries 12.1% Self-selection cosmetics 21.5% Counseling cosmetics 51.0% Note: Segment sales represent sales to external customers only and do not include intersegment sales or transfers. 14 SHISEIDO ANNUAL REPORT 2009 Cosmetics 84.6% Market Environment struggled due to competition from discount sales The domestic over-the-counter cosmetics market products and the challenge from products priced at contracted between 2 and 3 percent due to a rapid less than ¥1,000. Amid a strong trend toward low-priced cooling of consumer sentiment and a trend toward items, sales of products in the previously solid high low-priced items as the economy deteriorated. price range slowed due to an inability to fully capitalize Shiseido conducts business centered on the vol- on the strength of relationship building brands/lines. untary chain store channel, the structured retail store channel including drug stores and general merchandise stores, and the department store channel. Please see the Management’s Discussion and Analysis (pages 41 to 53) for a detailed discussion of the results of the domestic cosmetics segment. However, severe competition with other companies continues to increase. Initiatives in the Year Ending March 2010: Results in the Year Ended March 2009 Brand Strategy In the year ended March 2009, Shiseido promoted a Under the assumption that the market environ- strategy focused on measures to strengthen sales of 21 ment in the year ending March 2010 will be at least as core mega lines and relationship building brands/lines severe as in the previous year, Shiseido will further while continuing to innovate sales and Beauty promote distinction and concentration by targeting Consultant activities. stores and brands/lines to strengthen sales by channel. However, sales in each of the sub-segments of At voluntary chain stores, department stores and counseling cosmetics, self-selection cosmetics and toi- general merchandise stores, Shiseido will concen- letries fell short of the previous year against the back- trate on high price range and skincare, where growth is drop of a rapid deterioration in the consumer environ- forecast. Products at drug stores will center on the ment, resulting in a 6.1 percent decrease in sales. self-selection and toiletry product domains in Specifically, counseling-based cosmetics in the medium response to the trend toward low-priced items, partic- price range of ¥2,001 to ¥5,000 and self-selection ularly in haircare, skincare and men’s products, cosmetics in the low price range of ¥1,000 to ¥2,000 where Shiseido has significant room for growth. 6 Mega Lines 5 Relationship-Building Brands/Lines 21 Core Brands/Lines SHISEIDO ANNUAL REPORT 2009 15 Further Distinction and Concentration of Channels and Brands/Lines Channels Stores Voluntary chain stores “Power Shops” Department stores Bénéfique REVITAL GRANAS General merchandise stores Drugstores Tsubaki, Aqua Label, Uno Lines and merchandise domains Relationship building domain ・High price range products ・Skincare Self-selection/toiletry domains ・Low price range ・Haircare, skincare and men s products We will position stores in the voluntary chain core beauty essence products to all basic skincare store channel that strengthen ties with us as Power items. In department stores, we will continue to create Shops, and will focus on boosting sales there. separate counters for clé de peau BEAUTÉ and Initiatives will concentrate on measures specializing in expand the number of stores carrying the SYN- Bénéfique, innovative area advertisements focused ERGIQUE line, which sold well in 2008 as the high- on individual stores, support to create sales coun- end line of the brand. Meanwhile, the global brand ters, and increasing sample giveaways. After start- will undergo renewal to expand its in- ing with around 600 Power Shops and developing store share. best practices, we will expand the number of shops to around 2,000 to rebuild a powerful network of voluntary chain stores within three years. Shiseido is creating separate counters for clé de peau BEAUTÉ to increase its share of in-store sales. Shiseido will focus on strengthening sales by positioning 600 voluntary chain stores as Power Shops. In the drugstore channel, especially in major chains, Shiseido will focus on strengthening haircare, skincare and men’s products. We will intro- In the department store and general merchandise duce seamless marketing that takes advantage of store channels, Shiseido will focus on sales at base the momentum gained in haircare products from the stores of the relational line REVITAL GRANAS, renewal of the full line of Tsubaki products in late which was launched last year. We will continue to March 2009 to kick off a renewal of skincare brand steadily cultivate this line to expand the momentum of Aqua Label products and communication in skincare in 16 SHISEIDO ANNUAL REPORT 2009 Business Review autumn 2009. Following this we will launch a organizational structure capable of collectively han- groundbreaking UNO hair styling product. dling the proposals and challenges of each chain. Dedicated teams for developing shelving allocation patterns and sales techniques will be strengthened in addition to the sales divisions of the home office and sales subsidiaries. Meanwhile, brand managers Sales of the new Tsubaki, innovated in March 2009 with the addition of Camellia Oil EX, have remained steady since it was first launched. in charge of developing products and initiatives will participate in task forces formed to customize proposals to each chain. In order to reliably bring marketing content to stores, Shiseido will develop a front-line system Initiatives in the Year Ending March 2010: that enables counters to display merchandise simultaneously and within a short period of time. Management Strategy Shiseido will further strengthen its measures to innovate sales and Beauty Consultant activities. To innovate sales activities, Shiseido will further bolster the Diamond Sales system for structured retailers in order to secure sales by store. As opposed to the Butterfly Sales system, in which organizations negotiate at a single point through representatives, the Diamond Sales system enables multi-layer interaction by function and hierarchy, from head office negotiations on individual proposals that consider the character and needs of each store chain to measures and counter arrangement at actual stores. To that end, Shiseido will implement an In addition, renewal of basic training in professional sales skills, particularly for young sales staff, will further advance sales reforms. To innovate Beauty Consultant activities, we will strengthen information development and customer service education service that give greater priority to competition at the counter. This will include accurately conveying points that make Shiseido products superior to those of competitors and the effects of products through concise communication and demonstrations. In addition, we will develop systems for Beauty Consultants to fully demonstrate their strengths by improving benefits and the work environment. Top/regional head Top Top/regional head Top Manager Head of merchandise Manager Head of merchandise Salesperson in charge Manager Manager Sales staff Buyer in charge Person in charge of store Head office staff Head office staff Store manager, employees Person in charge of products, marketing Sales staff Salesperson in charge Buyer in charge Person in charge of store Head office staff Store manager, employees Information, distribution Butterfly Sales Diamond Sales SHISEIDO ANNUAL REPORT 2009 17 Overseas Cosmetics Business In the overseas cosmetics business, we will innovate and strengthen the global brand , accelerate our City Concept strategy and establish an undisputed presence in Asia in order to further enhance our competitiveness in the global market. Net Sales Operating Income (Billions of yen) (Billions of yen) 282.9* 263.7 260.9 17.9 224.3 174.5 Sales by Division 196.3 19.3* Professional 12.7% 15.0 10.4 Cosmetics 87.3% 2.8 0.7 05 06 07 08 09 05 06 07 08 09 Note: Segment sales represent sales to external customers only and do not include intersegment sales or transfers. * Sales and operating income on a local currency basis are translated into yen at 2008 exchange rates. 18 SHISEIDO ANNUAL REPORT 2009 Business Review Market Environment As a result of these measures, Asia and Oceania In the overseas cosmetics market, competition achieved high growth and all regions achieved higher with global competitors became even more intense sales on a local currency basis, including the U.S. amid a worldwide economic slowdown. Although the and Europe. All together, overseas cosmetics sales market grew steadily, driven in Asia mainly by increased 7.3 percent year on year on a local currency China and in Eastern Europe, especially by Russia, the basis. However, sales on a yen basis decreased by pace of growth is projected to decline in the year 1.1 percent due to the strong yen. ending March 2010. Results in the Year Ended March 2009 Please see the Management’s Discussion and Analysis (pages 41 to 53) for a detailed discussion of the results of the overseas cosmetics segment. To further enhance its competitiveness in the global market, Shiseido strengthened the global brand and deployed its expertise to develop business in Asia. Initiatives in the Year Ending March 2010: Global Development In China, a key market, Shiseido continued to Shiseido will promote the following three key implement a channel-specific brand marketing strategy. measures in the year ending March 2010 as it fur- In the extremely competitive department store channel, ther enhances its market strengths to rank among AUPRES, which underwent a full renewal for the first the top global competitors. time in 14 years, performed well according to plan. In The first measure is innovating the global brand the cosmetic specialty store channel, the number of . To follow the launch of a new makeup contracts for Shiseido Chain Stores increased and line in January 2009, we will introduce the new premium sales grew smoothly at existing stores. skincare line SHISEIDO Future Solution LX in 70 In other regions of Asia, Europe and the U.S., countries and regions in autumn 2009. In addition, development of the City Concept strategy, in which initiatives such as remodeling the functions and we view the world’s major markets as city-based design of counters and introducing a new symbolic rather than country-based units, centered on the sign1 will further strengthen the presence of the global global brand brand . In some targeted cities in as a prestige brand. To enhance the U.S., we expanded new customer numbers and the service ability of the approximately 9,000 Beauty increased sales in 2008. In the European and U.S. Consultants overseas who convey product value to cosmetics markets, fragrances comprise a significant customers, we will introduce behavioral indicators to share of sales. Our French subsidiary Beauté quantify our expertise in customer service based on Prestige International S.A. launched MaDame, a new the spirit of omotenashi (hospitality) globally, and bol- line of the Jean Paul GAULTIER designer fragrance ster training tailored to customers’ purchasing needs. brand, strengthening cultivation of the fragrance 1. Symbolic sign: A visual for advertisements and stores expressing Shiseido’s strengths of “Richness,” “Human science,” and “Spirit of omotenashi,” while representing the core value of the global brand . domain. In the travel retail business, Shiseido worked to attract new customers by opening new stores at major airports and expanding the number of products carried at duty-free stores and in-flight. SHISEIDO ANNUAL REPORT 2009 19 plans in Russia, where sales began through a subsidiary in the year ended March 2008. In addition, a sales subsidiary in Germany assumed operations in the Netherlands and Poland in January 2009, beginning direct operations. We will further strengthen our direct sales structure through sales subsidiaries. We also plan to enter Africa and other emerging markets. For the global brand , we will introduce the new makeup line SHISEIDO Perfect Rouge (top) and the premium skincare line SHISEIDO Future Solution LX (bottom). Initiatives in the Year Ending March 2010: Asia Development Shiseido will concentrate on enhancing its dominance in the domains of anti-aging and brightening. Based on the strong performance of brightening promotions held in Hong Kong during the previous fiscal year, we will expand these promotions throughout Asia. At the same time, we will expand sales of the self- The second measure is acceleration of the City Concept strategy. Marketing activities focused on target cities in the year ended March 2009 accomplished solid growth by attracting new customers and expanding sales. In the year ending March 2010, we will expand development to major cities in Europe, the Americas and Asia with significant influence globally to increase the ripple effect on neighboring markets. selection makeup brand MAJOLICA MAJORCA (MJ) for young customers as part of building expertise in the masstige business, which we plan to fully develop over the next three-year plan. Previously marketed only in Taiwan, MJ was launched in Hong Kong, Thailand, Malaysia, Singapore and other Southeast Asian countries at the end of 2008. We are building a solid business model for masstige by utilizing the achievements of initiatives such as these. The third measure is the expansion of operations in new and emerging markets. Strong results exceeded A promotion in Miami in the U.S. for the global brand in spring 2008, with in-store demonstrations by makeup artists, met with great success. 20 SHISEIDO ANNUAL REPORT 2009 Brightening promotions in Hong Kong in the year ended March 2009 were extremely successful, based on the concept of “A Century of Whitening.” Business Review Initiatives in the Year Ending March 2010: China Development Shiseido will further strengthen channel-specific brand marketing and maintain a high rate of growth in its China business, which has been expanding an average of over 20 percent per year. In the department store channel, we will strengthen the makeup domain, in which needs have increased in recent years, from a sales foundation built on skincare. In targeting customers from the new 1980s 1 Generation , launches of MAQUILLAGE as a new makeup line in summer 2009 and AUPRES in the autumn will follow the roll-out of a new makeup line for the global brand . In the cosmetic specialty store channel, the number of contracts for Shiseido Chain Stores and sales at existing stores are both growing steadily. However, we will redouble measures to expand sales at existing stores in anticipation of intensifying offensives by competitors. At the same time, we will develop new businesses Shiseido will strengthen the makeup domain with the introduction of the mega line MAQUILLAGE at counters in about 150 department stores in mainland China. and sales channels. The esthetic beauty brand Qi, a professional division product, was introduced at specialty stores with esthetic booths late in the previous fiscal year. We will continue to focus on such initiatives with the aim of generating synergy with cosmetics. 1. The 1980s Generation: The population segment of approximately 200 million born in the 1980s, now 18 to 28 years of age, that grew up under China’s one-child and economic reform policies and has progressive values. The website for the China-only brand URARA includes a homepage for responding to customers’ beauty concerns. SHISEIDO ANNUAL REPORT 2009 21 Feature: Shiseido’s Strengths in China Building Momentum as a Global Player Representing Asia with its Origins in Japan Shiseido is executing a Three-Year Plan with the aim of becoming a global player representing Asia with its origins in Japan. The following feature article covers the strengths Shiseido has built up in its China business, and the initiatives that Shiseido will execute in building momentum as a global player representing Asia. “Giving back to China by delighting customers” The origin of the company name “Shiseido” is a passage from the Chinese classic, I Ching (The Book of Changes): “praise the virtues of the great Earth, which nurtures new life and brings forth new values.” Shiseido has made great progress in China, where its name originates, but not simply by building scale for the sake of scale. Rather, our success in China has been the result of meticulous channel-specific brand strategies and a focus on activities that build brand value. Going forward, we will defend and enhance the brands we have built up to drive further progress and demonstrate even greater leadership in China’s cosmetics market than in the past. We want to provide even greater beauty and health to our customers in China, and fill their hearts with a sense of fulfillment. China has given us our name and the opportunity to nurture our business, and we intend to give back to China. Masaru Miyagawa Corporate Officer, Chief Officer of China Business Division and Chief Area Manager of China 22 SHISEIDO ANNUAL REPORT 2009 Shiseido’s Progress in China >>> Shiseido Has Been in China Longer than Its Competitors Three Decades of Development in China Shiseido began its relationship with China in 1981 by exporting cosmetics for sale in hotels and other outlets in Beijing. In 1983, we concluded an agreement with the city of Beijing to share production technology. Production cooperation began with haircare products, after The History of Shiseido’s Business in China 1981: Start of sales of about 60 imported products at large retail shops and hotels in Beijing 1983: First agreement to share production technology with the city of Beijing; this relationship continues to the fourth such agreement signed in 1991 which production technology sharing continued for approximately 10 1991: Establishment of Shiseido Liyuan Cosmetics Co., Ltd., a joint venture with the city of Beijing years. The profound trust built in this relationship with Beijing is a 1993: Start of production at Beijing Factory cornerstone of Shiseido’s business in China today. In 1991, we established a joint venture, Shiseido Liyuan Cosmetics Co., Ltd., with government company Beijing Liyuan Co., Ltd. We launched AUPRES, a brand for high-end department stores, and strengthened the joint venture’s business base. As a result, Shiseido established a strong presence as a high-end brand in China. In 2004, 1994: Launch of AUPRES, a brand exclusively for China 1998: Establishment of Shanghai Zotos Citic Cosmetics Co., Ltd. as a cooperative company 1999: Start of production at Shanghai Zotos Citic Cosmetics Co., Ltd. factory 2002: Establishment of Shiseido China Research Center Co., Ltd. Shiseido launched its cosmetics specialty store organization by con- 2003: Establishment of Shiseido China Co., Ltd., a wholly owned subsidiary, in Shanghai cluding formal contracts to handle Shiseido products with cosmetics 2004: Start of cosmetics specialty store business in China stores operated by sole proprietors, and then steadily and carefully 2006: Launch of the URARA brand for cosmetics specialty stores expanded its network of stores, one by one. Shiseido now has a corporate brand image of high quality, reliability and safety. Thus Shiseido has long worked to develop a business rooted in China. This has been a key factor supporting growth to date. Hua Zi haircare products created for the technology-sharing agreement with the city of Beijing Shiseido Liyuan Cosmetics Co., Ltd. was established in 1991 as a joint venture company. Shiseido established Shanghai Zotos Citic Cosmetics Co., Ltd. in 1998 with the aim of adding the new middle mass market to its presence in the prestige market. The Hua Zi makeup line launched in 1987 In 1994, Shiseido launched AUPRES, a brand exclusively for department stores in China that has gone on to become a popular national cosmetics brand. In 2004, Shiseido began sales of cosmetics through cosmetics specialty stores, and in 2006, launched a brand exclusively for this channel, URARA. SHISEIDO ANNUAL REPORT 2009 23 Advantages Supporting Shiseido’s Growth in China >>> Strategy: Develop Products that Meet the Needs of Chinese Women Product Development in Tune with the Characteristics of China Shiseido has been accumulating research worldwide on women’s skin, and has built a massive volume of data, research materials and other information on skin and hair. Shiseido has used this data in developing cosmetics for China, and for approximately 30 years has been conducting detailed research on subjects including the skin and hair of Chinese women and China’s weather and climate. In particular, we have recently been using methods such as group interviews and surveys at people’s homes and on the street to meticulously research the attitudes and tastes of Chinese women regarding beauty, which are changing significantly. Customers have responded enthusiastically to the AUPRES brand sold only in department stores in China and the URARA brand sold only in cosmetics specialty stores in China because we gave these products features that match the tastes of Chinese women. AUPRES holds top share at many of the department stores that handle it. Moreover, in 2002 we established Shiseido China Research Center Co., Ltd., which conducts research in areas such as Chinese medicine We Pay Attention to Chinese Women to Make Uniquely Chinese Products Shiseido deploys its understanding of the diversifying sensibilities and needs of Chinese women in developing and beauty not only for the Chinese market, but with an eye on global markets as well. We plan to add more Chinese staff and enhance research functions in the future. its exclusive brands for China. For example, whereas Japanese women emphasize the entire face when applying makeup, Chinese women take a different approach that focuses on the area around the eyes. As part of our A Solid System for Local Production and Procurement Shiseido has two production bases in China, in Beijing and efforts to develop products based Shanghai. The Beijing factory manufactures all AUPRES and on the results of such surveys, we SUPREME AUPRES products, while the Shanghai factory manufac- will launch products proposing this tures products including URARA as well as PURE & MILD and Za for the eye-centric approach, starting with SUPREME AUPRES and URARA. middle market. Today, 70 percent of the products Shiseido in sells in China Going forward, we will continue to are manufactured there, with the exception of imports such as the global pay attention to Chinese women in brand order to propose new beauty styles that delight them. Satomi Ando Marketing Development Department, China Business Division 24 SHISEIDO ANNUAL REPORT 2009 . In addition, Shiseido procures approximately 90 percent of its locally used raw materials in China. Shiseido’s Strengths in China >>> A Channel-Specific Brand Strategy That Is Plugged into Customer Needs The Department Store Channel Establishes Powerful Brand Value Channels and Brands/Lines in the Chinese Market Department Stores In its China business, Shiseido uses a channel-specific brand strategy that matches products and marketing to customer needs in respective Ultra-high-end Global brand sales channels. In the department store channel, we focus on developing stores that can bring out brand value. China has about 1,500 department stores, but Shiseido has established rigorous standards for stores to carry its products, which include store location, design, level of service and customer demographics. Currently, AUPRES is sold in approximately 750 stores, while the global brand Import clé de peau BEAUTÉ is sold in only about 150 stores. In the year ended March 2010, we will renew Non-Shiseido brands such as IPSA High-end Local production Standard Exclusive to China; Local production Brands exclusively for department stores SUPREME AUPRES AUPRES Import regional lines Aqua Label Uno Toiletry lines Local production Non-Shiseido brands such as Za Voluntary chain store brands such as URARA and PURE & MILD AUPRES makeup and introduce a mega line from Japan, Maquillage. This will strengthen skincare and makeup, thus further enhancing Structured retailers Cosmetics specialty stores the Shiseido Group’s position in the department store channel. Cosmetics Specialty Store Channel: Expanding Nationwide In the cosmetics specialty store channel, store by store Shiseido has been promoting contracts with cosmetics specialty stores operated by sole proprietors that share its philosophy and management approach. We Contributing to the Development of China’s Cosmetics Market through Cosmetics Specialty Stores My relationship with Shiseido began with my recogni- concluded the first contract in 2004 in Zhejiang, and since then have tion of the superior quality of the PURE & MILD products I extended the network of stores to small and medium-sized regional was selling. When Shiseido initiated the cosmetics specialty cities and the areas surrounding large cities. Today, Shiseido products are store business in Fujian in 2004, I concluded a contract. In turn, Shiseido provided lectures and training for the training sold from Kashgar in the far west Hsinchiang Uighur Autonomous manager and sales support for the sales manager prior to Region to the southernmost island of Hainan. the actual start of business to help us acquire specialized Since the year ended March 2009, we have also been establishing knowledge and revise our sales methods, which has attracted more customers to the new “PURE & MILD Excellent Stores,” a format that permits stores to store. Shiseido has pioneered the handle only the exclusive cosmetic specialty store brand PURE & cosmetics specialty store business in MILD. As planned, the number of stores covered by the two types of con- China and has contributed significantly to expanding the cosmetics market. tracts exceeded 4,000 by March 2009, and we plan to have contracts with I view Shiseido as the premier cos- over 5,000 stores by March 2011. metics company. Mr. Zheng Lei Yu Owner of Xin Tian Di, a cosmetics specialty store in Pu Tian, Fujian SHISEIDO ANNUAL REPORT 2009 25 >>> Omotenashi, the Hospitality that Only Shiseido Can Provide Introducing Omotenashi In selling cosmetics, Shiseido believes that enhanced counseling is one of the best methods for improving customer satisfaction. That is why we are also implementing our style of customer service, a Shiseido strength, in China. It was challenging when we first started, but we knew we would not succeed in China without expanding customer service based on Shiseido’s unique spirit of omotenashi. Educating personnel is most important in introducing and institutionalizing omotenashi. Just as in Japan, we are meticulously creating opportunities for study in areas such as product knowledge, Shiseido’s approach to customer service and beauty consultation techniques. These initiatives are not limited to Shiseido beauty consultants; they are also open to people at cosmetics specialty stores who spend a significant amount of time serving customers. Moreover, a Shiseido instructor visits cosmetics specialty stores once a week, and area-based training seminars take place once every three months. In these and other ways, Shiseido works assiduously to ensure that the value of Shiseido brands is conveyed in all aspects of the business, from the design of stores and sales Creating a Feeling of Omotenashi for Customers in China Not mere product sales, but sales based on proposing beauty methods. That is the concept the China Business counters to customer management. Further Enhancing Customer Satisfaction Division works hard to instill in its training. Other essential Shiseido opened the Shiseido China Training Center in Shanghai in training includes thorough coverage of the effect of cos- March 2008 to further strengthen its training system. This center provides metics and how to use them. The other day, I heard that a a variety of training for Shiseido employees such as beauty consultants, customer at a cosmetics specialty store commented that the store had become very professional about beauty. salespeople and administrative staff, and for managers and salespeople China continues to change, and in from Shiseido business partners. In the year following its establish- order to consistently create a feel- ment, the center has provided training to more than 10,000 employees and ing of omotenashi we are working to cultivate education managers to prepare the next generation of people who will be responsible Shiseido’s business in China. for 100 people from business partners. Moreover, we promote efforts to tailor service and beauty consulting to each customer. We enhance counseling tailored to customer skin and preferences by using customer data and other information collected Satomi Takeyama General Manager, Training Department Training Division Shiseido China Co., Ltd. from point-of-sale (POS) systems installed at all cosmetics specialty stores. We also use a unified database of information collected from the URARA website to encourage customers to visit cosmetics specialty stores and to strengthen customer service. 26 SHISEIDO ANNUAL REPORT 2009 Shiseido’s Strengths in China Continued Progress in the Future >>> Enriching the Hearts of Chinese Women Accelerating Energetic Initiatives in the Constantly The Growth of China’s Cosmetics Market Expanding Chinese Cosmetics Market (Index) Shiseido The Chinese Market China’s cosmetics market is currently valued at approximately ¥1.4 trillion yen. According to Shiseido’s calculations, the number of cosmetics users in China is about 60 million, which is larger than the number of users in Japan. Growth in the cosmetics markets parallels real growth in gross domestic product, meaning strong potential for growth in the future. The core cosmetics users were born in the 1980s. This demo- 100 2000 2002 2004 2006 2008 (Calendar year) graphic, nicknamed the New 1980s Generation in China, is very interested in cosmetics and beauty. Shiseido will step up marketing oriented to this demographic. As a symbol of its efforts, Shiseido will continue to take on the challenge of the Chinese market and actively promote business development. Together with Chinese Society Shiseido must deepen its roots and establish a powerful presence in Asia, particularly in the region’s principal market of China, to achieve its goal of SHISEIDO LIFE QUALITY BEAUTY CENTER was established in Shanghai as part of Shiseido’s CSR initiatives in China. becoming a global player representing Asia with its origins in Japan. Accordingly, Shiseido is contributing to Chinese society through cosmetics. Shiseido dispatched Beauty Consultants to China and held local beauty seminars to support the Chinese League of Women’s “Feminine from the Heart: Educational Project to Cultivate an Ideal of Beauty for Chinese Women” program leading up to the 2008 Beijing Olympics. In 2009 and beyond, Shiseido will continue proposing ways for Chinese women to cultivate their beauty through various programs including Shiseido China Co., Ltd. has become the official cosmetics product sponsor for World Expo Shanghai 2010, and was the first Japanaffiliated company to become a sponsor for this expo. Beauty Seminars at companies, universities, and groups such as the Association of Women Mayors. In April 2009, we opened SHISEIDO LIFE QUALITY BEAUTY CENTER to provide makeup advice to people with serious skin concerns such as birthmarks, vitiligo and scarring. Going forward, Shiseido will continue taking various approaches in helping Chinese women enhance their beauty. Shiseido is also actively conducting environmental initiatives. In addition to afforestation, in September 2009 Shiseido became the first major manufacturer of cosmetics in China to use plastic containers made with eco-friendly polylactic acid. These containers are used for prod- Afforestation activities at Lanzhou on the Loess Plateau in China’s Gansu Province are in their second year. Shiseido initiated the 10-year afforestation program in 2008. Shiseido helped establish an elementary school as a way to give back to China. ucts in the URARA brand sold only in cosmetics specialty stores. SHISEIDO ANNUAL REPORT 2009 27 Corporate Governance Corporate Governance Policy Management and Execution Structure Shiseido is setting higher standards of corporate gov- Since adopting a corporate executive officer system in the ernance based on the understanding that maximizing cor- year ended March 2002, Shiseido has worked to strengthen porate and shareholder value, fulfilling social responsibilities decision-making functions, enhance management trans- and achieving sustainable growth and development are parency and soundness, clarify the allocation of responsi- key to maintaining support as a valuable company from all bility and reinforce supervisory and auditing functions. stakeholders (customers, business partners, shareholders, employees and society). The Board of Directors is composed of ten members including two external directors. The Board of Directors meets at least once a month to discuss all significant mat- ■ Overview of Corporate Governance Reforms Strengthen decisionmaking functions Enhance management transparency and soundness 2001 Established Corporate 2001 Established Remuneration Executive Officer Committee and Policy Meeting of Corporate Officers 2002 Reduced number of directors Committee 2005 Established Nomination Advisory Committee Management transparency, fairness and speed 2001 Introduced corporate 2001 2006 2006 2006 executive officer system Introduced 1-year term for directors Set upper term limit per position Formulated rules governing promotions and demotions for corporate officers Lowered upper age limit per position for holding office 2005 Increased number of external corporate auditors from 2 to 3 2006 Appointed external directors Clarify allocation of responsibility 28 SHISEIDO ANNUAL REPORT 2009 ters. Attendance for external directors at the 14 Board of Directors meetings in the year ended March 2009 averaged 93 percent. Attendance for other directors was 100 percent. Through the adoption of a corporate executive officer system, we are separating the decision-making and supervisory functions of the Board of Directors from the business execution functions of corporate officers. The Corporate Executive Officer Committee, which acts as the final decision-making body regarding corporate officers’ material issues, accelerates operational decision making. Shiseido’s President & Chief Executive Officer, who also serves as the Chief Operating Officer, chairs this Committee. The term of office of directors is one year, and the term limit of corporate officers is four years per position in Reinforce supervisory and auditing functions principle and six years maximum. To obtain an outside point of view and further strengthen the Board of Directors’ supervisory function Representative directors and corporate auditors meet in regard to business execution, Shiseido appointed two regularly to exchange opinions on actions that will external directors from the year ended March 2007. resolve corporate governance issues. Shiseido maintains a Having external directors has stimulated discussion at framework to ensure that corporate auditors discharge Board of Directors meetings and strengthened its supervi- their duties effectively. For example, the Company sory capabilities. arranges liaison meetings with the accounting auditors In addition, two of the eight directors aside from the and the Internal Auditing Department in addition to external directors have built careers outside of Shiseido, assigning full-time staff to assist in audits. Corporate auditor promoting diversity among the directors. Wide perspec- attendance for the 14 Board of Auditors meetings held in tive and insight based on differing backgrounds and the year ended March 2009 was 100 percent. For external areas of expertise will promote objectivity and strengthen corporate auditors, attendance at Board of Directors the Board’s supervisory function. meetings was 95 percent and for standing corporate audi- We are also handpicking a small and able group of executive officers in addition to recruiting younger members. tors, attendance was 100 percent. Internal audits of the entire Group are conducted to ensure that business is To promote transparency and objectivity in manage- executed in an appropriate manner, and audit results are ment, Shiseido established two committees to play an advi- reported to the Board of Directors and Board of Auditors. sory role to the Board of Directors: the Remuneration Committee, which recommends executive remuneration Remuneration to Directors, Corporate Officers levels, and the Nomination Advisory Committee, which and Corporate Auditors conducts various duties including proposing the list of can- Remuneration for directors and corporate officers didates for directors and corporate officers. Both committees consists of a basic fixed portion and a performance- are chaired by external directors to maintain objectivity. linked portion that fluctuates depending on achieving management targets and share price. Since the year Audit Structure ended March 2006, these portions have been nearly Shiseido’s Board of Auditors consists of two standing equal. Effective the year ended March 2009, the per- corporate auditors and three external corporate auditors. formance-linked portion has been revised upward to Corporate auditors monitor the legality and adequacy of 60 percent of remuneration in order to further raise directors’ performance by attending Board of Directors the meetings and other important meetings. Performance-linked remuneration consists of a bonus incentive for attaining performance targets. ■ The Company’s System for the Management and Execution of Business General Meeting of Shareholders Appointment, termination Accounting Auditors Resolution at the General Meeting of Shareholders based on laws Appointment, termination Appointment, termination Audit Audit Board of Auditors Board of Directors Advisory committees to the Board of Directors Advisory committees to the Board of Directors Remuneration Committee CSR Committee Report Supervision Compliance Committee Nomination Advisory Committee Corporate Executive Officer Committee Proposal of material issues based on laws Resolution, approval Proposal Policy Meeting of Corporate Officers Resolution, approval Decision-Making Meeting of Corporate Officers SHISEIDO ANNUAL REPORT 2009 29 based on annual consolidated results, medium-term remuneration based on the achievement of the final year targets of the Three-Year Plan, to be paid at the culmination of the plan, and stock options as long-term incentive, primarily aimed at fostering a shared awareness of profits with shareholders. Performance-linked remuneration is designed to give directors and corporate officers a medium-to-long-term perspective, not just a single-year focus, and to motivate management to become more aware of Shiseido’s performance and ① Remuneration to two retiring directors Basic remuneration of ¥15 million and stock options of ¥3 million for the period from April to June 2008 was paid to two directors that retired as of the conclusion of the 108th Ordinary General Meeting of Shareholders held on June 25, 2008. ② Remuneration to one retiring corporate auditor Basic remuneration of ¥3 million for the period from April to June 2008 was paid to one corporate auditor that retired as of the conclusion of 108th Ordinary General Meeting of Shareholders held on June 25, 2008. 2. In addition to the payments above, two subsidiaries of the Company paid a total of ¥25 million as basic fixed remuneration during the fiscal year to two directors concurrently serving as directors of the two subsidiaries. The two subsidiaries paid ¥1 million as a bonus for the year ended March 2009. ■ Remuneration to Accounting Auditors for the Year Ended March 2009 (Millions of yen) share price. Item External directors receive basic fixed remuneration only because of the importance of a stance independent from business execution in their supervisory functions. Due to the nature of auditing, corporate auditors receive fixed basic remuneration only, to eliminate linkage with performance. Amount Remuneration paid for services rendered as accounting auditors for the fiscal year under review 152 Total cash and other remuneration to be paid by the Company and its subsidiaries to their accounting auditors 186 Note: In the audit contract between the Company and its accounting auditors, remuneration paid for audits under the Corporate Law and audits under the Financial Instruments and Exchange Law are not clearly distinguished and cannot be practically separated. Therefore, the total payment for both is shown in “Remuneration to Accounting Auditors” above. Shiseido sets remuneration levels commensurate with achievement of performance targets and by making Management System Unique to Shiseido comparisons with companies in the same industry and Guided by the idea that fulfilling corporate social similar businesses with a high percentage of revenues responsibility (CSR) is crucial to Shiseido’s sustained from overseas. Basic remuneration for directors and cor- development, we have established the CSR Committee porate auditors is within the monthly remuneration limits and the Compliance Committee under the jurisdiction decided by the General Meeting of Shareholders; per- of the Board of Directors as part of our corporate gover- formance-linked remuneration, including the bonus, nance structure. Both committees are headed by the medium-term remuneration and long-term incentive Vice President and comprise members elected compa- stock options, is also set on a case-by-case basis by reso- nywide. They make proposals for and report on plans lution at the General Meeting of Shareholders. and results of activities to the Board of Directors. The unfunded retirement benefit plan for directors The CSR Committee carries out comprehensive moni- and corporate auditors was abolished in the year ended toring from a companywide perspective, with the aim of March 2005. increasing corporate value. The Compliance Committee works to ensure legitimate and fair business practices in the ■ Remuneration to Directors and Corporate Auditors ethics, risk management and information security coun- for the Year Ended March 2009 (Millions of yen) Basic Directors (10 people) External directors (2 of the 10) Corporate auditors (6 people) External auditors (4 of the 6) Total Bonuses Group, and promotes activities including corporate Stock options Total 283 36 71 390 26 — — 26 96 — — 96 termeasures to enhance management quality. Compliance and Risk Management We have enacted Group-wide Corporate Ideals, The Shiseido Way (Corporate Behavior Declaration) and 36 — — 36 The Shiseido Code (Corporate Ethics and Behavior 379 36 71 486 Standards), which outline the standards of behavior Notes: 1. The following remuneration to directors and corporate auditors is included in the above amounts. 30 SHISEIDO ANNUAL REPORT 2009 that individual Group employees should apply in their Corporate Governance work, and are actively promoting legitimate and fair Department establishes and monitors the management of business practices. internal controls throughout the Group. The internal We hold regular workshops on corporate ethics and control report is disclosed on the Company’s website. human rights education, and assign a Code Leader to each office to ensure observance of The Shiseido Code. Discontinuation of Anti-Takeover Measures Code Leaders report on the progress in promoting Shiseido adopted a plan for countermeasures to large- legitimate and fair business practices at their respective scale acquisitions of its shares (anti-takeover measures; offices. We have also established multiple reporting hereinafter the “Plan”) based on the approval of its share- and consultation help lines, which include advice from holders obtained at the 106th Ordinary General Meeting of external lawyers, to detect and correct at an early stage Shareholders held on June 25, 2006. The Plan was effective actions that contravene the law, The Shiseido Code or until the conclusion of the 108th Ordinary General other regulations, and to identify distress in employees. Meeting of Shareholders. However, steady implementa- The Compliance Committee takes a cross-depart- tion of the Three-Year Plan from the year ended March mental approach to dealing with risks. The committee 2009 will increase Shiseido’s competitiveness and main- identifies and evaluates risk in management strategy tain sustainable growth in the global markets and assure or operations and administrative operations, and promotes increase its corporate value. Shiseido therefore passed a res- necessary preventative measures and activities. It pre- olution at its Board of Directors meeting held on April 30, pares manuals for use in emergencies, and in the event of 2008 to discontinue the Plan and delete the governing an emergency, it responds by organizing a countermea- article from the Company’s articles of incorporation by sure headquarters, project, team, or other grouping as dic- resolution of the 108th Ordinary General Meeting of tated by the seriousness of the situation. Shareholders. Shiseido’s Board of Directors has adopted and disclosed a basic policy for internal control systems. In addition, in the year ended March 2009, the sub- Shiseido will continue to strengthen its corporate governance system to enhance corporate and shareholder value and the quality of management. mission of reports on internal controls for financial reporting was institutionalized. The Internal Auditing Corporate Mission We seek to identify new, richer sources of value and use them to create a beautiful lifestyle. With our customers Through the creation of products possessing true value and exceptional quality, we strive to help our customers realize their dreams of beauty, well-being and happiness. Joining forces with partners who share our goals, we act in a spirit of sincere With our business partners cooperation and mutual assistance. Mission Company Rules and Regulations Corporate practice, daily business activities With our shareholders We strive to win the support and trust of our shareholders through transparent management practices and sound business results achieved by high-quality growth, enabling the retention of earnings for future investments and payment of dividends. With our employees The diversity and creativity of our employees make them our most valuable corporate asset. We strive to promote their professional development and we evaluate them fairly. We recognize the importance of our employees’ personal satisfaction and well-being, and seek to grow together with them. With our society We respect and obey all laws in regions in which we do business. Safety and preservation of the natural environment are among our highest priorities. In cooperation with local communities and in harmony with international society, we employ our cultural resources in creating a beautiful lifestyle. SHISEIDO ANNUAL REPORT 2009 31 Contributing to Society employees with childcare responsibilities to accompany Corporate Social Responsibility (CSR) Policy Shiseido actively promotes both fundamental CSR spouses transferred within Japan. Shiseido received the 3rd required of a company and selective CSR unique to (2008) Nikkei Parent-Friendliness Award in the year Shiseido. At the center of our CSR activities is a focus on ended March 2009 in recognition of its overall child-raising meticulously addressing all customer beauty needs support measures. throughout life, as reflected in the corporate message of Shiseido received the 2009 Integrity Award Grand “This Moment. This Life. Beautifully.” Specifically, Prize from the Integrity Award Council in March 2009. Shiseido will further strengthen social activities through The award recognized the Company’s ongoing internal cosmetics, an approach that is unique to the Company; control and corporate ethics activities. enhance measures that address environmental prob- In the area of human rights, we continue to pursue lems, which are an important global issue; support initiatives in the context of our own corporate activities women, who make up over 70 percent of Company while participating in education activities outside the employees and 90 percent of its customers; and enhance Company. In 2004, Shiseido joined the United Nations the safety and reliability that are the basis of trusting Global Compact. In December 2008, as part of our support, relationships with customers. we joined the CEO Statement, an initiative launched by the Global Compact on the 60th anniversary of the Universal Declaration of Human Rights. The statement declares to Fundamental CSR Fundamental CSR, the most basic responsibilities of a the world, “We also reiterate our own commitment to company, involves efforts for our customers, respect for respect and support human rights within our sphere of employee diversity, business partnerships, the protection of influence. Human rights are universal and are an important personal information, and work environment safety and business concern all over the globe.” hygiene. Shiseido addresses these issues as a Group. In the year ended March 2009, we implemented support Selective CSR Unique to Shiseido measures for employees to balance work, childcare and Shiseido actively pursues social contribution activi- family life, including extending eligibility for reduced ties through its core business of cosmetics that best work hours for child rearing through the third grade of ele- reflect the Company’s unique character and are most mentary school and offering child nursing care leave in expected from society. In the year ended March 2009, half-day increments, in addition to a program allowing Shiseido employees participated as volunteers at the first ■ CSR Activities Domain Creating new markets Proposing new social values Social contribution activities (philanthropy) Unique Shiseido CSR Strict compliance with laws and regulations Environmental conservation, information disclosure, protection of personal information, protection of human rights Continued Corporate existence Providing high-quality products and services Valuing employees Collaboration with business partners Profit and dividends Payment of taxes and creation of employment opportunities 32 SHISEIDO ANNUAL REPORT 2009 Fundamental CSR President Maeda delivers an address at the ceremony where Shiseido received the Integrity Award Grand Prize. national conference of XP (Xeroderma Pigmentosum) cooperating with medical institutions to provide makeup Association Japan, a group supported by the Shiseido advice to people with serious skin concerns. In June 2006, we Social Contribution Club-Camellia Fund. Employee activi- opened a central facility in the Shiseido head office in ties at the conference included giving a seminar on correct Ginza, Tokyo, to provide free advice. Moreover, in April usage of sunscreen cosmetics for XP, an incurable dis- 2009 we launched the SHISEIDO LIFE QUALITY BEAUTY ease whose patients have a high probability of developing CENTER for the first time overseas in Shanghai, China, cancer when their skin is exposed to ultraviolet light. and Taipei and Kaohsiung, Taiwan, and are working to Through various social activities, Shiseido dissemi- develop these activities globally. nates the cultural capital it has cultivated since the We also hold SHISEIDO LIFE QUALITY BEAUTY Company’s foundation 137 years ago. We provide unique SEMINARS at all branches in Japan. Through these support for promising new talent and art, such as “shiseido skincare, makeup and other beauty seminars, we assist art egg” public exhibitions for up-and-coming artists held at the elderly and physically challenged in working to the Shiseido Gallery since the year ended March 2007. achieve the beauty they desire. In the year ended March For further information regarding Shiseido’s CSR 2009, approximately 36,000 people participated. In April activities, please see the CSR website. 2009, we established a system to enable as many employ- http://www.shiseido.co.jp/e/csr/ ees and former employees as possible to join in giving these seminars. SHISEIDO LIFE QUALITY BEAUTY PROGRAM Since its foundation, Shiseido has sought to use the results of its accumulated beauty-related research in both We will continue to promote the SHISEIDO LIFE QUALITY BEAUTY PROGRAM as a symbol of our social contribution activities through cosmetics. products and methods to help all customers achieve the beauty they desire through a process of physical and emotional enrichment. In particular, we have actively worked to support improvements in quality of life (QOL) by providing our distinctive beauty methods and products through the SHISEIDO LIFE QUALITY BEAUTY PROGRAM. Since the 1990s, Shiseido has been developing foundation to cover birthmarks and other skin concerns, while Many employees and former employees participate in the SHISEIDO LIFE QUALITY BEAUTY PROGRAM. Shiseido CSR Report 2009 on the Shiseido website SHISEIDO ANNUAL REPORT 2009 33 Environmental Initiatives Basic Policy for Environmental Activities Shiseido has faithfully shown consideration for the Overview of the Shiseido Group’s Environmental Efforts Corporate Ideals environment since its foundation, with respect and esteem for the natural habitat that is a cornerstone of the Shiseido Eco Policy Company’s identity, as embodied in the origin of its name, a phrase in the Chinese classic I Ching meaning Mission “praise the virtues of the great Earth, which nurtures new life and brings forth new values.” In the year ended March 2009, Shiseido formulated Aim for the realization of a society where humanity and the earth’s environment can co-exist Project Name the Shiseido Basic Environmental Policy for all companies in the Shiseido Group in order to fulfill its social responsibility and to establish an unsurpassed, worldclass quality of business management as set in the All employees throughout the world work together Unique Shiseido activities + Basic environmental activities Three-Year Plan. The plan clearly places environmental initiatives at the core of management. Shiseido aims to achieve a competitive advantage by addressing the environment in all its business activities. Reduce CO2 emissions, conserve resources Goals Achieve a new lifestyle linking beauty and eco activities in a way that is unique to Shiseido Environmental Management Framework In 1992, Shiseido set the Shiseido Eco Policy as a management policy regarding the environment. To ensure that Basic Environmental Activities and Environmental Activities Unique to Shiseido the Group’s domestic and international operations pro- In its environmental plan, the Company classifies envi- mote environmental activities in line with this policy, in ronmental initiatives into basic environmental activities 1997 Shiseido established Global Eco Standards to serve and unique Shiseido activities. as activity guidelines. Responses to environmental chal- Fundamental environmental activities strengthen envi- lenges were classified into six categories: product develop- ronmental consciousness in all work processes and encom- ment; research and development; manufacturing and pro- pass obvious duties of global citizens such as reducing CO2 curement; distribution; sales; and offices. Each category emissions and conserving resources. Specifically, while consists of (1) a basic policy, (2) specific design and action aiming to achieve our promise to society to reduce CO2 standards, and (3) operating standards to implement those emissions at domestic plants 15 percent by fiscal 2010 standards. In addition, in 2006 Shiseido formulated the (compared with fiscal 1990 levels; per unit of production), we Supplier Code of Conduct with the aim of combining will respond appropriately to a variety of laws and regulations efforts with business partners such as suppliers of ingredients to reduce CO2 emissions and waste at all branches, including and promotional materials, and contract manufacturers. those overseas. In addition, we will gather data within To further strengthen environmental management Japan and overseas and reflect it in companywide environ- based on these policies and rules, in April 2009 we estab- mental targets to be set in the year ending March 2011, lished the Environmental Control Office in the Social while managing with a strong awareness of reducing envi- Affairs and Consumer Relations Department to oversee ronmental burden in each phase of business. environmental activities throughout the Company. This On the other hand, environmental activities unique to department will be central in accelerating plan implementation Shiseido are measures to propose new lifestyles in which and collaborating in order to promote environmental activities. human beauty and the environment coexist through our 34 SHISEIDO ANNUAL REPORT 2009 main business as a cosmetics company. From the year Global Compact, as an opportunity to express to the world its ending March 2010, we launched the Shiseido Earth Care strong dedication to the environment. Project, an environmental initiative with a membership comprising all Group employees. In March 2009, Shiseido became the first company in the cosmetics industry in Japan to be certified as an “Eco-First We will engage in a wide range of initiatives through Company” by Japan’s Ministry of the Environment. The these environmental activities, including minimizing product Eco-First Program was created by the Ministry of the returns and reducing waste, in order to use resources Environment in April 2008 to encourage leading compa- effectively. nies in each industry to further expand their environmental protection activities by having them make a commitment Shiseido’s Promise to Society to the Minister for the Environment. In addition to reporting In the year ended March 2009, Shiseido made a promise the progress of initiatives to the Ministry of the to society to carry out environmental activities as an envi- Environment, we will officially announce the results ronmentally progressive company. through our website and other channels. In November 2008, Shiseido endorsed “Caring for Climate: The Business Leadership Platform,” a climate change initiative being spearheaded by the United Nations “Caring for Climate: The Business Leadership Platform” (Summary) 1. Take practical actions now to increase the efficiency of energy usage and to reduce our CO2 emissions, set voluntary targets for doing so, and report publicly on the achievement of those targets annually in our Communication on Progress. 2. Build significant capacity within organizations to understand fully the implications of climate change for business and develop a coherent business strategy for minimizing risks and identifying opportunities. Also, engage fully and positively with our own national governments, intergovernmental organizations and civil society organizations to develop policies and measures that will provide an enabling framework for the business sector to contribute effectively to building a low carbon economy. 3. Work collaboratively with other enterprises nationally and sectorally, and along our valuechains, by setting standards and taking joint initiatives aimed at reducing climate risks, assisting with adaptation to climate change and enhancing climate-related opportunities. Shiseido’s “Eco-First Commitment” (Summary) 1. Shiseido will actively pursue initiatives to prevent global warming. 2. Shiseido will actively pursue initiatives to realize a recycling-oriented society. 3. Shiseido will actively propose activities for realizing a society characterized by the beautiful coexistence of people and the Earth both inside and outside the Company. SHISEIDO ANNUAL REPORT 2009 35 Board of Directors, Corporate Auditors and Corporate Officers (As of June 24, 2009) Directors 1970 2003 2003 2005 Joined Shiseido General Manager of Corporate Planning Department Director, Corporate Officer Representative Director, President & CEO Responsibilities: Responsible for Public Relations, Consumer Information and Corporate Culture Responsible for Corporate Culture Reform, Environmental Measures, Life Quality Beauty Program, and Committees under Direct Control of the Board of Directors Shinzo Maeda Kimie Iwata Representative Director, President & CEO Representative Director, Vice President Responsibilities: Chief Financial Officer Responsible for Finance, Investor Relations and Information System Planning Responsible for Internal Control President & CEO, Shiseido Business Solutions Co., Ltd. 1971 Joined Shiseido 2003 General Manager of Corporate Restructuring Department 2003 Corporate Officer 2005 Director Yasuhiko Harada 2006 Corporate Executive Officer Director, Corporate Senior 2008 Corporate Senior Executive Officer Executive Officer Committees: Chair of CSR Committee and Compliance Committee Responsibilities: Responsible for Domestic Cosmetics Business Sales President and Representative Director, Shiseido Sales Co., Ltd. President and Representative Director, FT Shiesido Co., Ltd. Toshimitsu Kobayashi 1971 Joined Shiseido 1999 General Manager of Nagoya Branch of Shiseido Cosmetics Sales Co., Ltd. 2002 Corporate Officer 2004 Director, Corporate Executive Officer 2006 Corporate Senior Executive Officer Director, Corporate Senior Executive Officer Responsibilities: Responsible for Research & Development, Production, Technical Affairs and Logistics Responsibilities: Responsible for Global Business (International Business, China Business and Professional Business) Chief Officer of International Business Division 1969 Joined Shiseido 2003 General Manager of International Business Planning Department, International Operations Headquarters 2003 Director, Corporate Officer 2006 Corporate Executive Officer 2009 Corporate Senior Executive Officer Masaaki Komatsu Carsten Fischer Director, Corporate Senior Executive Officer Director, Corporate Executive Officer Responsibilities: General Manager of Corporate Planning Department 1979 Joined Hans Schwarzkopf GmbH 2004 Corporate Officer, President, Professional Care at the Procter & Gamble Company 2006 Corporate Advisor of Shiseido 2007 Corporate Executive Officer 2008 Director Responsibilities: Responsible for Business Strategy and Marketing of Domestic Cosmetics Business 1982 Joined Shiseido 2007 General Manager of the Cosmetics Business Planning Department 2008 Corporate Officer 2009 Director 1975 2006 2007 2009 Hisayuki Suekawa* Tatsuomi Takamori* Director, Corporate Officer Director, Corporate Officer 1997 President, ASKUL Corporation 2000 CEO, ASKUL Corporation 2006 External Director of Shiseido Joined Shiseido Chief Officer of China Business Division Corporate Officer Director 1997 Professor, School of Law, Waseda University 2003 Professor, Graduate School of Law, Waseda University 2006 External Director of Shiseido 2006 Dean of Faculty of Law and the School of Law, Professor of Waseda Law School and Waseda University 2008 Director, Global Center of Excellence – Waseda Institute for Corporation Law and Society Committees: Chair of Remuneration Committee Shoichiro Iwata Tatsuo Uemura External Director External Director 36 SHISEIDO ANNUAL REPORT 2009 1971 Entered Ministry of Labour 2001 Director-General, Equal Employment, Children and Families Bureau, Ministry of Health, Labour and Welfare 2003 Corporate Advisor of Shiseido 2004 Director, Corporate Officer 2007 Corporate Executive Officer 2008 Representative Director, Vice President Committees: Chair of Nomination Advisory Committee Corporate Auditors Kiyoharu Ikoma Kazuko Ohya Corporate Auditor Corporate Auditor 1971 Joined Shiseido 2003 Chairman and Director, Shiseido International Corporation 2006 Corporate Auditor 1973 Joined Shiseido 2000 General Manager of Consumer Information Center 2001 Corporate Officer 2007 Corporate Auditor Akio Harada Reiko Kuroda External Corporate Auditor External Corporate Auditor 2004 Attorney at Law 2005 External Corporate Auditor of Shiseido 1992 Professor, Department of Chemistry, College of Arts and Sciences, and Department of Biological Science, Graduate School of Science, The University of Tokyo 1996 Professor, Department of Life Sciences, Graduate School of Arts and Sciences, The University of Tokyo 2008 External Corporate Auditor of Shiseido Nobuo Otsuka External Corporate Auditor 1988 President, Keiseikai Hospital 2007 External Corporate Auditor of Shiseido Corporate Officers Corporate Executive Officer Kiyoshi Kawasaki Responsible for Advertising Creation and Beauty Solutions and Domestic Non-Shiseido Brand Business Corporate Officers Kozo Hanada Tsunehiko Iwai Chief Officer of Professional Business Operations Division Responsible for Technical Planning and Technical Affairs General Manager of Quality Management Department Masaru Miyagawa* Shoji Nishiyama Chief Officer of China Business Division and Chief Area Managing Officer of China Chairman, Shiseido China Co., Ltd. Responsible for Cosmetics Products Research & Development and Software Development Shoji Takahashi Mitsuo Takashige Responsible for the Americas Chairman & CEO, Shiseido Americas Corporation Responsible for Personnel General Manager of Personnel Department Kazuo Tokubo Takafumi Uchida Responsible for Functional Food, Innovative Science Research & Development and Patents Responsible for General Affairs, Legal Affairs and Executive Affairs General Manager of General Affairs Department Ryuichi Yabuki Toshio Yoneyama Responsible for Sales Operations Planning of Domestic Cosmetics Business General Manager of Sales Department, Specialty Stores Vice President and Director, Shiseido Sales Co., Ltd. Responsible for Healthcare Business and Frontier Sciences Business Chief Officer of Healthcare Business Division President and Representative Director, Shiseido Beauty Foods Co., Ltd. Corporate officer retired as of March 31, 2009: Tamio Inaba * New appointment SHISEIDO ANNUAL REPORT 2009 37 Main Subsidiaries and Af filiates (As of March 31, 2009) Company Name Location Paid-in Capital Main Business1 Equity ownership percentage3 ¥100 million 100.0 Chuo-ku, Tokyo ¥10 million 100.0 Shiseido International Inc. Chuo-ku, Tokyo ¥30 million 100.0 FT Shiseido Co., Ltd. Chuo-ku, Tokyo ¥100 million Shiseido Professional Co., Ltd. Chuo-ku, Tokyo ¥250 million 100.0 Shiseido Beauty Salon Co., Ltd. Chuo-ku, Tokyo ¥100 million 100.0 Shiseido Pharmaceutical Co., Ltd. Chuo-ku, Tokyo ¥100 million 100.0 Shiseido Americas Corporation Delaware, U.S.A. Shiseido Sales Co., Ltd. Minato-ku, Tokyo Shiseido FITIT Co., Ltd. Shiseido America, Inc. New York, U.S.A. Zotos International, Inc. Connecticut, U.S.A. Shiseido International Europe S.A. Paris, France Shiseido International France S.A.S. Paris, France Shiseido Deutschland GmbH Dusseldorf, Germany Shiseido Cosmetici (Italia) S.p.A. Milan, Italy Shiseido Europe S.A.S. Paris, France Beauté Prestige International S.A. Paris, France Laboratoires Declér S.A. Paris, France Shiseido China Co., Ltd. Shanghai, China Shanghai Zotos Citic Cosmetics Co., Ltd. Shanghai, China Shiseido Liyuan Cosmetics Co., Ltd. Beijing, China Shiseido Dah Chong Hong Cosmetics Ltd. Hong Kong, China Taiwan Shiseido Co., Ltd. Taipei, Taiwan The Ginza Co., Ltd. Domestic cosmetics business (Thousands of U.S. dollars) 100.0 $403,070 100.0 (Thousands of U.S. dollars) $28,000 (100.0) 100.0 (Thousands of U.S. dollars) $25,000 (100.0) (Thousands of euro) 100.0 €247,473 100.0 (Thousands of euro) €36,295 (100.0) 100.0 (Thousands of euro) €5,200 (100.0) 100.0 (Thousands of euro) €2,400 (Thousands of euro) €9,000 100.0 (100.0) Overseas cosmetics business 100.0 (100.0) 100.0 (Thousands of euro) €17,760 (100.0) 100.0 (Thousands of euro) €19,374 (100.0) (Thousands of yuan) 100.0 CNY565,093 92.6 (Thousands of yuan) CNY418,271 (72.6) 65.0 (Thousands of yuan) CNY94,300 (33.0) (Thousands of HK dollars) 50.0 HKD123,000 (Thousands of NT dollars) NTD1,154,588 51.0 Chuo-ku, Tokyo ¥100 million 98.2 Shiseido Parlour Co., Ltd. Chuo-ku, Tokyo ¥100 million Selan Anonymous Association2 Chiyoda-ku, Tokyo Other: 61 subsidiaries — — — — (Equity-method affiliates): 3 companies — — — — Others 99.3 — ¥11,600 million [100.0] Notes: 1. The segment name is noted in the Main Business column. 2. A company of less than 50 percent equity ownership that is treated as a subsidiary because Shiseido is essentially in control. 3. Numbers in parentheses include indirect equity ownership, and numbers in brackets represent ownership by parties with a close relationship or those in agreement with Shiseido. 38 SHISEIDO ANNUAL REPORT 2009 Financial Section Six-Year Summary of Selected Financial Data ·········· 40 Management’s Discussion and Analysis ··················· 41 Consolidated Financial Statements ··························· 54 Notes to the Consolidated Financial Statements ······ 59 Independent Auditors’ Report ··································· 75 SHISEIDO ANNUAL REPORT 2009 39 Six-Year Summar y of Selected Financial Data Shiseido Company, Limited, and Subsidiaries For the years ended March 31, 2004 to 2009 Thousands of dollars (Note 1) Millions of yen (Except per share data) 2004 Operating Results: Net sales ····························· ¥624,248 Cost of sales (Note 2) ············ 166,299 Selling, general and administrative expenses (Note 2) ·················· 420,471 37,478 Operating income (Note 2) ····· 82,341 EBITDA (Note 3) ··················· 27,541 Net income (loss) ·················· Financial Position (At year-end): Total assets ························· ¥626,730 47,678 Short-term liabilities (Note 4) ······· 18,480 Long-term debt····················· 66,158 Interest-bearing debt ············· Net assets ··························· 385,336 (Except per share data) 2005 2006 2007 2008 ¥639,828 168,636 ¥670,957 176,884 ¥694,594 185,533 ¥723,485 186,466 444,663 26,529 29,043 (8,856) 455,194 38,879 58,963 14,436 459,056 50,005 78,036 25,293 473,554 63,465 94,960 35,460 ¥701,095 25,213 69,114 94,327 369,957 ¥671,842 12,786 69,492 82,278 387,613 ¥739,833 66,144 61,694 127,838 403,797 ¥675,864 38,653 24,566 63,219 399,739 2009 2009 ¥690,256 $7,024,791 171,752 1,747,934 468,590 49,914 70,149 19,373 4,768,878 507,979 713,912 197,161 ¥606,569 $6,173,102 27,601 280,898 34,452 350,621 62,053 631,519 351,951 3,581,834 Per Share Data (In yen and U.S. dollars): Net income (loss) (Note 5) ······ Net assets (Note 5) ················ Cash dividend······················· Weighted average number of shares outstanding during the period (thousands) ·········· ¥ 64.9 903.7 22.0 ¥ (21.5) 866.5 24.0 ¥ 34.4 906.1 30.0 ¥ 60.9 940.8 32.0 ¥ 86.1 946.2 34.0 ¥ 48.0 839.9 50.0 414,723 414,219 412,855 412,572 407,696 403,240 Financial Ratios: Operating profitability (%) (Note 2) ·· Return on assets (%) ············· Operating ROA (%) (Notes 2 and 6)····· Return on equity (%) ·············· Equity ratio (%) ····················· Interest coverage ratio (times) (Note 7) ··· Debt-equity ratio (times) ········· Payout ratio (Consolidated)(%) ······· Total return ratio (%) (Note 8) ······ Number of employees at year-end ···· Net sales per employee ·········· 6.0 4.3 6.0 7.6 59.8 18.2 0.18 33.9 51.2 24,839 ¥25.1 4.1 (1.3) 4.3 (2.4) 51.2 22.1 0.26 — — 24,184 ¥26.5 5.8 2.1 5.9 3.9 55.7 8.6 0.22 87.2 105.1 25,781 ¥26.0 7.2 3.6 7.4 6.6 52.5 30.6 0.32 52.6 52.6 27,460 ¥25.3 8.8 5.0 9.4 9.2 56.6 39.1 0.16 39.5 108.8 28,793 ¥25.1 7.2 3.0 8.2 5.4 55.6 23.6 0.18 104.1 127.2 28,810 ¥24.0 $0.49 8.55 0.51 $244 Notes: 1. U.S. dollar amounts are converted from yen, for convenience only, at the rate of ¥98.26 = US$1 prevailing on March 31, 2009. 2. Cost of sales, selling, general and administrative expenses, operating income, operating profitability and operating ROA for years up to March 31, 2005 have been retrospectively restated to reflect changes in accounting policies for the year ended March 31, 2006. 3. EBITDA (Earnings before interest, tax, depreciation and amortization) = Income (loss) before income taxes + Interest expense + Depreciation and amortization 4. Short-term liabilities = Short-term debt + Current portion of long-term debt 5. Net income (loss) per share (primary) is based on the average number of shares outstanding during the fiscal year. Net assets per share is calculated using the number of shares outstanding as of the balance sheet date. 6. Operating ROA = (Operating income + Interest and dividend income) ÷ Total assets (Yearly average) 7. Interest coverage ratio = Net cash provided by operating activities ÷ Interest paid* *As stated in the statements of cash flows 8. Total return ratio = (Cash dividend + Share buybacks*) ÷ Net income *Excluding odd-lot purchases 40 SHISEIDO ANNUAL REPORT 2009 Management’s Discussion and Analysis Operating Results Accounting Standard for Lease Transactions,” (ASBJ Guidance No.16, issued March 30, 2007). Therefore, Shiseido now Overview treats such leases as capital leases. The financial and economic crisis that originated in the United States spread during the fiscal year ended March 31, In addition, effective the fiscal year ended March 31, 2009, Shiseido applied “Practical Solution on Unification of 2009. The global economic downturn from fall 2008 affected the Accounting Policies Applied to Foreign Subsidiaries for Japanese economy, causing corporate results to deteriorate Consolidated Financial Statements” (ASBJ Practical Issues rapidly. Consumer spending weakened due to concerns about Task Force No. 18, issued May 17, 2006), and adjusted its employment instability and uncertainty about the direction of financial statements accordingly. the economy. (Please refer to Notes to the Consolidated Financial Statements,“2. Amid these conditions, Shiseido aimed to become a global player representing Asia with its origins in Japan, and initiated a Summary of Significant Accounting Policies,” for additional details regarding the changes in accounting policies.) new Three-Year Plan to improve the quality of activities across the board. In the fiscal year ended March 31, 2009, the first year of the Net Sales new Three-Year Plan, Shiseido strengthened the global brand Net sales decreased 4.6 percent on a yen basis to ¥690,256 , deployed its expertise to develop business in million ($7,024,791 thousand), and decreased 1.6 percent on a Asia, and concentrated on creating a brand loved by customers local currency basis. Domestic sales decreased year on year, throughout the world with a focus on nurturing core brands/lines in reflecting a sudden cooling of consumer sentiment. By contrast, the domestic market. In addition to promoting reform of its overseas sales were solid, especially in China, but were profit structure, Shiseido raised organizational capabilities, nurtured eroded by the yen’s appreciation during the period. Sales human resources and strengthened corporate governance in both in Japan and overseas therefore decreased year on year. working to establish an “unsurpassed, world-class quality of business management.” Moreover, as a living corporation that is Net Sales/Overseas Sales Ratio part of society, Shiseido promoted CSR activities including (%) 60 (Billions of yen) 800 social contributions and environmental protection. However, even though Shiseido devoted all of its strengths to these corporate activities, the fiscal year ended March 31, 600 45 400 30 200 15 2009 was unfavorable because of the impact of the global downturn. The market environment was a negative force that kept Shiseido from achieving the full result of reforms continuing 0 0 2005 from the previous three-year plan. As a result, for the fiscal year ended March 31, 2009, net sales decreased 4.6 percent compared with the previous fiscal year to ¥690,256 million ($7,024,791 thousand), and operating 2006 2007 2008 2009 Net Sales Overseas Sales Ratio 639.8 671.0 694.6 723.5 690.3 27.5 29.4 32.4 36.5 38.0 Domestic Sales Overseas Sales 464.1 473.7 469.8 459.2 428.3 175.7 197.2 224.8 264.3 262.0 income decreased 21.4 percent to ¥49,914 million ($507,979 thousand). The operating margin was 7.2 percent. Shiseido and impairment losses reported by overseas subsidiaries. As a Cost of Sales and Selling, General and Administrative Expenses result, net income declined 45.4 percent to ¥19,373 million [Cost of Sales] recognized other expenses including restructuring expense Cost of sales decreased 7.9 percent compared with the ($197,161 thousand). previous fiscal year to ¥171,752 million ($1,747,934 thousand), and the ratio of cost of sales to net sales decreased 0.9 Changes in Accounting Policies Effective the fiscal year ended March 31, 2009, Shiseido percentage points to 24.9 percent. Factors in the improve- applied “Accounting Standard for Measurement of Inventories” ment included the result of ongoing efforts to reduce cost of (ASBJ Statement No. 9, issued July 5, 2006). sales, and also improvement in the domestic product mix. Previously, Shiseido treated finance lease assets that did Moreover, Shiseido scaled back or withdrew from services not transfer ownership as operating leases. From the fiscal businesses such as the lease business, which had a high cost of year ended March 31, 2009, however, Shiseido applied sales ratio. Other factors included the greater proportion to net “Accounting sales of sales in China, where cost of sales is relatively low. Standard for Lease Transactions” (ASBJ Statement No. 13, issued March 30, 2007) and “Guidance on SHISEIDO ANNUAL REPORT 2009 41 [Selling, General and Administrative Expenses] new core business processing system. Overseas, however, Selling, general and administrative (SG&A) expenses decreased 1.0 costs resulting from business expansion and other issues percent compared with the previous fiscal year to ¥468,590 million increased in China, which continues to be a growing market. ($4,768,878 thousand). The ratio of SG&A expenses to net The ratio of other expenses to net sales rose as a result. sales increased 2.5 percentage points to 67.9 percent despite cost reductions in Japan because Shiseido invested aggres- Operating Income sively in marketing costs and other outlays overseas, particularly Operating income decreased 21.4 percent compared with in China. Analysis of the major components of SG&A expenses the previous fiscal year to ¥49,914 million ($507,979 thou- is included in the following sections. sand). The operating margin decreased 1.6 percentage points to Marketing Costs 7.2 percent. Marketing costs consist of advertising and promotional expenses. The ratio of marketing costs to net sales Operating Income/Operating Profitability (Billions of yen) 80 increased 0.8 percentage points to 23.7 percent. In Japan, Shiseido invested to distinguish and (%) 10 concentrate brands/lines. Shiseido also worked to increase cost efficiency by concentrating marketing costs on certain brands/lines, such as the new Revital Granas line and the 60 7.5 40 5 20 2.5 innovation of the Maquillage line. Overseas, however, 0 Shiseido invested aggressively to support the critical Chinese market and designer fragrances. The ratio of marketing costs to net sales rose as a result. 0 2005 Operating Income Operating Profitability 2006 2007 2008 2009 26.5 38.9 50.0 63.5 49.9 4.1 5.8 7.2 8.8 7.2 Personnel Expenses The ratio of personnel expenses to net sales increased 1.0 percentage point compared with the previous fiscal year to Other Income (Expenses) 22.3 percent. In Japan, a reduction in bonuses for employees Net other expenses totaled ¥11,428 million ($116,304 thou- offset an increase in pension expenses. Overseas, however, sand), compared with net other income of ¥2,060 million for the the Shiseido Group added employees in China, which con- previous fiscal year. tinues to be a growing market. Moreover, factors including Net interest income, calculated as interest and dividend increased compensation as a result of new Chinese income less interest expense, totaled ¥1,009 million ($10,269 employment laws contributed to the year-on-year increase in thousand), a decrease of 7.9 percent compared with net interest personnel expenses. The ratio of personnel expenses to income of ¥1,095 million for the previous fiscal year. In addition, net sales rose as a result. foreign exchange loss totaled ¥275 million ($2,799 thousand), compared with foreign exchange loss of ¥1,649 million for the Cost of Sales Ratio/ SG&A Expenses Ratio previous fiscal year. A pronounced change in exchange rates near (%) 30 (%) 70 the end of the previous fiscal year resulted in a substantial foreign 29 69 exchange loss on revaluation of foreign currency deposits 28 68 held in Japan and other assets. 27 67 26 66 25 65 24 64 previous fiscal year, partly reflecting lower earnings at Pierre 23 63 Fabre Japon, which sells the Avène brand of Laboratoires 2005 Cost of Sales Ratio (Left scale) SG&A Expenses Ratio (Right scale) 2006 2007 2008 Equity in earnings of affiliates decreased 61.2 percent year on year to ¥58 million ($590 thousand) from ¥149 million for the 2009 26.4 26.4 26.7 25.8 24.9 69.5 67.8 66.1 65.4 67.9 Pierre Fabre in Japan. In the fiscal year ended March 31, 2008, the sale of shares in Shiseido Logistics Co., Ltd. and Shiseido Lease Co., Ltd. resulted in gain on sale of shares in affiliates totaling ¥3,097 million. In the fiscal year ended March 31, 2009, the Other Expenses The ratio of other expenses to net sales increased 0.7 percentage points to 21.8 percent. Other expenses sale of shares in Shiseido Real Estate Development Co., Ltd. resulted in gain on sale of shares in affiliates totaling ¥71 million ($723 thousand). decreased year on year in Japan as lower logistics, leasing and Impairment loss totaled ¥6,073 million ($61,805 thousand), an other costs compensated for higher costs associated with a increase of ¥4,922 million compared with impairment loss of 42 SHISEIDO ANNUAL REPORT 2009 Management’s Discussion and Analysis ¥1,151 million for the previous fiscal year. This loss consisted pri- Net Income (Loss)/Return on Equity marily of impairment totaling ¥4,928 million ($50,153 thou- (Billions of yen) 40 sand) recognized for DECLÉOR brand goodwill and trademark (%) 12 30 9 20 6 10 3 thousand), an increase of ¥5,476 million from ¥598 million for the 0 0 previous fiscal year. This consisted primarily of expenses (10) rights as a result of declining profitability due to the worsening environment in the European professional business. Restructuring expenses totaled ¥6,074 million ($61,816 totaling ¥2,689 million ($27,366 thousand) related to the liquidation of Shiseido Beautech Co., Ltd. and expenses totaling (3) 2005 2006 2007 2008 2009 (8.9) 14.4 25.3 35.5 19.4 (2.4) 3.9 6.6 9.2 5.4 Net Income (Loss) Return on Equity ¥2,465 million ($25,087 thousand) related to the withdrawal of THE GINZA from its boutique business. Review by Business Segment Income before Income Taxes Results by business segment follow below. Income before income taxes decreased 41.3 percent compared with the previous fiscal year to ¥38,486 million ($391,675 thousand). Domestic Cosmetics Sales in the domestic cosmetics business segment decreased 6.1 percent compared with the previous fiscal year to Income Taxes, Including Deferred Taxes ¥412,338 million ($4,196,397 thousand). During the fiscal Income taxes, including deferred taxes, decreased 40.8 per- year, consumer spending weakened suddenly as the econo- cent compared with the previous fiscal year to ¥15,137 million my deteriorated. This led to dramatic changes in the market, ($154,050 thousand) as a result of the decrease in income including a heightened trend toward price rationalization. In before income taxes. The effective tax rate was 39.3 percent, response, Shiseido sought to raise the quality of all activities, compared with 39.0 percent in the previous fiscal year. such as promotional, sales and merchandising activities, in order to win the support of customers, particularly in the low and Minority Interests in Net Income of Consolidated Subsidiaries middle price ranges. However, the quality of sales activities did not increase enough to sustain customer support, and Minority interests in net income of consolidated sub- segment sales declined. sidiaries decreased 11.5 percent compared with the previous fis- [Cosmetics Division] cal year to ¥3,976 million ($40,464 thousand), due to factors such as restructuring expenses at joint ventures in Asia. Sales in the cosmetics division decreased 6.9 percent compared with the previous fiscal year, with lower sales year on year of counseling products, self-selection products Net Income Net income decreased 45.4 percent compared with the previous fiscal year to ¥19,373 million ($197,161 thousand). Net income per share decreased to ¥48.0 ($0.49) from ¥86.1 for the previous fiscal year. and toiletries. During the year, we continued nurturing our mega lines and focused on nurturing our relationship building brands/lines. Among our mega lines, we innovated the Maquillage makeup line, and we added a new skincare range of Elixir Prior Return on equity decreased 3.8 percentage points to 5.4 aimed at seniors. We also worked to strengthen cultivation of percent from 9.2 percent for the previous fiscal year because of existing brands/lines in ways such as updating promotional lower net income. campaigns for each of our lines. For our relationship building brands/lines, despite growing emphasis on low-priced products, we focused on the highpriced market, which has consistently performed well. During the year, we launched Synergique, a top-end line within the prestige Clé de Peau Beauté brand. We also unveiled a brand-new line, called Revital Granas, targeting “new luxury” women in their 30s or older. [Professional Division] Sales in the professional division, which manufactures and markets products and services for hair and beauty salons, SHISEIDO ANNUAL REPORT 2009 43 decreased 2.3 percent compared with the previous fiscal year due to the rapid deterioration of the economy. In the beauty salon services sector, we opened a Salon & Spa In the cosmetics specialty store channel, we continued to increase the number of contracts for Shiseido Chain Stores. Concurrently, we worked to expand sales at existing stores in Ginza, and sales increased slightly year on year as we through initiatives such as strengthening the China-only worked to create new sales outlets. In hair and beauty salon URARA brand of products sold exclusively in this channel. product sales, we shifted to a new marketing style that Moreover, we worked to enhance customer satisfaction emphasizes the quality of our merchandising proposals, and through the activities of a customer center in China, and pro- strengthened the human resources of our sales department. moted cultivation of human resources through means including While sales in the beauty salon services sector increased, the operation of a training center in China. overall professional division sales were down year on year Outside of China, in Asia, Europe and North America, due to a substantial decrease in hair and beauty product sales. Shiseido continued strengthening cultivation of the global [Healthcare Division] brand and expanded customer support through Sales in the healthcare division continued to rise, increasing 3.1 ongoing marketing activities with a focus on anti-aging and percent compared with the previous fiscal year. In the market for skin-brightening products, which are areas of strength for the beauty supplements, where strong growth is expected, we Shiseido Group. In addition, under our “City Concept” we concentrated resources on expanding sales of the Collagen consider the world’s major markets as city-based rather than line of beauty supplements for enhanced skin regeneration, country-based units, and we concentrated allocation of which drove sales growth for the healthcare division. In addition, resources in target cities. We also made progress in establishing we attracted attention with the launch of Shiseido Chomeiso, a business bases in emerging markets, including the com- supplement using a herb from Yonaguni Island (Peucedanum mencement of full-scale operations at our Russian sales sub- japonicum, Umbelliferae). sidiary Shiseido (RUS), LLC. Furthermore, in Europe and North America, where fra- Operating income for domestic cosmetics decreased 23.5 percent compared with the previous fiscal year to ¥33,004 million ($335,884 thousand), and the segment operating margin was 7.9 percent. The primary factor was a substantial drop in gross profit due to the decrease in sales. Other factors included an increase in the reserve for sales returns because of an increase in retail inventories due to the worsening market environment, as well as an increase in pension expenses. Overseas Cosmetics Sales in the overseas cosmetics segment increased 7.3 percent compared with the previous fiscal year on a local currency basis, but decreased 1.1 percent on a yen basis to ¥260,916 million ($2,655,363 thousand). Despite economic contraction in many regions, Shiseido maintained a high rate of sales growth in China, and also increased sales in Europe and North America. [Cosmetics Division] Division sales increased 8.5 percent on a local currency basis and 0.4 percent on a yen basis compared with the previous fiscal year. In China, our key overseas market, the number of people using cosmetics continued to grow. Shiseido continued to grances occupy a key position in the cosmetics market, Beauté Prestige International S.A. (BPI) added a new line, MA DAME, to its Jean Paul GAULTIER line of designer fragrances, and worked to strengthen cultivation of the ISSEY MIYAKE and NARCISO RODRIGUEZ lines and Shiseido Group fragrance products. Moreover, we gained new customers in our travel retail business centered on duty-free shops in airports by increasing the number of shops in hub airports that handle our products and expanding the number of products specifically for duty-free shops and in-flight sales. [Professional Division] Division sales decreased 0.3 percent on a local currency basis and 10.2 percent on a yen basis compared with the previous fiscal year. Zotos International, Inc., which manufactures and sells products for salons globally with a focus on North America, increased sales by working aggressively to develop the market through means such as launching the JOICO haircare line in Hong Kong. However, the worsening market environment in Europe impacted the DECLÉOR and CARITA esthetic beauty and spa treatment brands. aggressively implement its channel-specific marketing strategy, with a focus on dedicated brands for the Chinese market. Operating income of the overseas cosmetics segment In the department store channel, Shiseido innovated AUPRES, a decreased 16.1 percent to ¥14,994 million ($152,595 thousand), and China-only brand for the department store channel that has sup- the operating margin was 5.7 percent. While Shiseido increased ported growth in China since its launch, for the first time in 14 sales in highly profitable regions and businesses and managed years. Moreover, initiatives such as sales promotion renewal expenses efficiently, segment operating income decreased year on and department store sales counter remodeling supported year mainly because of the appreciation of the yen. strong sales growth in this intensely competitive channel. 44 SHISEIDO ANNUAL REPORT 2009 Management’s Discussion and Analysis Others Operating income in Japan decreased 42.0 percent com- Sales in other businesses decreased 18.1 percent com- pared with the previous fiscal year to ¥18,433 million pared with the previous fiscal year to ¥17,002 million ($187,594 thousand). The operating margin was 4.0 percent. The ($173,031 thousand). The decrease was primarily the result of primary factor was a substantial drop in gross profit due to the the divestiture of the lease company Shiseido Lease Co., Ltd. decrease in sales. Other factors included an increase in the during the previous fiscal year and The Ginza Co., Ltd.’s with- reserve for sales returns because of an increase in retail drawal from its boutique business. inventories due to the worsening market environment, as well as [Frontier Sciences Division] an increase in pension expenses. The frontier sciences division handles items such as medical-use drugs, cosmetics raw materials, chromatography, and cosmetic Americas dermatology treatments. Sales rose as sales in Japan and overseas Sales in the Americas increased 1.8 percent compared with continued to increase for bio-hyaluronic acid, a raw material the previous fiscal year on a local currency basis. Sales used in cosmetics and pharmaceuticals. decreased 10.4 percent on a yen basis to ¥50,657 million ($515,540 thousand) due to appreciation of the yen versus the Operating income from other businesses decreased 25.8 percent compared with the previous fiscal year to ¥1,481 million ($15,073 thousand) and accounted for 5.2 percent of segment sales. The divestiture of Shiseido Lease Co., Ltd. and the withdrawal from the boutique business were primary factors in the decrease. U.S. dollar. In the cosmetics division, Shiseido secured earnings growth through new product launches for global brand skin care and BPI fragrances amid a recessionary environment in the United States. Sales in Canada and elsewhere were also solid. In the professional division, sales of Zotos International, Inc. Net Sales by Business Segment were firm. (Billions of yen) 750 Operating income in the Americas decreased 18.0 percent compared with the previous fiscal year to ¥3,276 million 500 ($33,339 thousand), due to slowing sales growth and the impact of the appreciation of the yen. The operating margin 250 was 5.6 percent. 0 2005 2006 2007 2008 2009 Domestic Cosmetics Overseas Cosmetics Others 445.3 453.4 447.6 439.0 412.4 174.5 196.3 224.3 263.7 260.9 20.0 21.3 22.7 20.8 17.0 Total 639.8 671.0 694.6 723.5 690.3 Europe Sales in Europe increased 2.1 percent compared with the previous fiscal year on a local currency basis. Sales decreased 3.6 percent on a yen basis to ¥100,034 million ($1,018,055 thousand) due to appreciation of the yen versus the euro. Operating Income by Business Segment (Billions of yen) Domestic Cosmetics Overseas Cosmetics Others 2005 2006 In the cosmetics division, worsening market conditions 2007 2008 2009 25.5 34.3 36.9 43.1 33.0 0.7 2.8 10.4 17.9 15.0 (0.1) 1.0 2.2 2.0 1.5 impacted subsidiaries in Italy and other countries. Sales of BPI fragrances such as the newly launched MA DAME in the Jean Paul GAULTIER line increased. In the professional division, sales of the esthetic beauty and Operating Profitability by Business Segment (%) 2005 2006 2007 2008 2009 Domestic Cosmetics Overseas Cosmetics Others 5.7 0.4 (0.2) 7.5 1.4 2.4 8.1 4.6 4.9 9.7 6.7 5.0 7.9 5.7 5.2 Note: Operating profitability is calculated against sales for the segment, including intersegment sales. spa treatment brands DECLÉOR and CARITA were flat. Operating income in Europe decreased 8.1 percent compared with the previous fiscal year to ¥8,258 million ($84,043 thousand), mainly because of slowing sales growth and the appreciation of the yen. The operating margin was 7.8 percent. Asia/Oceania Review by Geographic Segment Japan Sales in Japan decreased 6.7 percent compared with the previous fiscal year to ¥429,963 million ($4,375,768 thousand) due to Sales in Asia/Oceania increased 15.9 percent on a local currency basis. Sales increased 7.0 percent on a yen basis to ¥109,602 million ($1,115,428 thousand) due to the overall appreciation of the yen versus Asian currencies. Sales grew steadily in the cosmetics division, centered on the key market of China. a decline in sales of the core domestic cosmetics business. SHISEIDO ANNUAL REPORT 2009 45 In the cosmetics division, high growth continued in China, securing sufficient capital for operating activities and maintaining including Hong Kong. Sales were also solid in countries other sufficient liquidity and a sound financial position. We fund working than China, particularly Korea and Thailand. Sales growth was capital, capital expenditures, and investments and loans needed for also strong in the travel retail business. sustainable growth by supplementing cash on hand and operating Operating income in Asia/Oceania increased 5.7 percent cash flow with bank borrowings and bond issues. compared with the previous fiscal year to ¥16,779 million As of March 31, 2009, Shiseido maintained a sufficient level of ($170,761 thousand), as higher gross profit resulting from liquidity. The use of diverse funding methods provided a high sales growth compensated for an increase in strategic mar- level of financial flexibility. One of our targets for short-term liq- keting expenditures and higher personnel expenses in China. The uidity is to maintain cash on hand at a level of approximately 1.5 operating margin was 15.3 percent. months of consolidated net sales. As of March 31, 2009, cash and time deposits together with short-term investments in Net Sales by Geographic Segment (Billions of yen) securities totaled ¥104,755 million ($1,066,100 thousand). It 2005 2006 2007 2008 2009 Japan Americas Europe Asia/Oceania 467.0 43.1 79.8 49.9 475.7 46.0 85.6 63.7 471.2 51.7 88.4 83.3 460.7 56.6 103.8 102.4 430.0 50.7 100.0 109.6 Outside Japan 172.8 195.3 223.4 262.8 260.3 represented 1.8 months of consolidated net sales. As of March 31, 2009, interest-bearing debt totaled ¥62,053 million ($631,519 thousand). This figure includes lease liabilities in the fiscal year ended March 31, 2009. Shiseido has diversified funding methods. These include an unused shelf registration in Japan for ¥70.0 billion of straight bonds. Moreover, Shiseido Co., Operating Income by Geographic Segment (Billions of yen) 2005 2006 Ltd. and two subsidiaries in the United States and Europe 2007 2008 2009 Japan Americas Europe Asia/Oceania 12.5 24.0 (0.2) 0.9 5.0 5.4 6.5 7.7 27.3 31.8 18.4 2.8 4.0 3.3 6.3 9.0 8.3 11.2 15.9 16.8 Outside Japan 11.3 14.0 20.3 28.9 28.4 2005 2006 2.6 4.8 (0.3) 1.7 6.1 6.0 12.9 12.0 Japan Americas Europe Asia/Oceania 6.2 Outside Japan 6.7 2007 the United States has also established an unused commercial paper program totaling $90 million. Shiseido recognizes that it needs to maintain a certain level of 2008 2009 5.5 6.5 4.0 4.7 6.1 5.6 6.8 8.3 7.8 13.4 15.5 15.3 8.6 10.4 10.3 Note: Operating profitability is calculated against sales for the segment, including intersegment sales. Overseas Sales (by Destination) commitments totaling $240 million. A financial subsidiary in Credit Ratings Operating Profitability by Geographic Segment (%) have established a syndicated loan program with unused credit rating to secure financial flexibility that is consistent with its capital/liquidity policies and to secure access to sufficient capital resources through capital markets. Shiseido has acquired ratings from Moody’s Investors Service Inc. (Moody’s) and Standard and Poor’s (S&P) to facilitate fund procurement in global capital markets. Moody’s (Billions of yen) 300 Long-term Aa3 (Outlook: Stable) Short-term P-1 200 S&P A+ (Outlook: Stable) A-1 (As of May 31, 2009) 100 On July 15, 2008, Moody’s upgraded Shiseido’s long-term credit rating to Aa3 from A1. The rating action reflected 0 2005 Americas Europe Asia/Oceania Total 2006 2007 2008 2009 Moody’s view that Shiseido’s earnings and cash flow should 44.3 47.5 54.0 59.3 54.9 74.9 80.4 79.3 92.8 88.5 56.5 69.3 91.5 112.1 118.6 improve and stabilize at a level higher than ever — supported by 175.7 197.2 224.8 264.3 262.0 an ongoing business strategy that focuses on strong cost initiatives, effective brand management, and steady expansion of overseas operations. The rating action also incorporated Shiseido’s solid financial fundamentals, based on prudent Liquidity and Capital Resources financial policy, which should support any strategic action Financing and Liquidity Management designed to expand growth as well as improve profitability. Shiseido seeks to generate stable operating cash flow and ensure a wide range of funding methods, with the aims of 46 SHISEIDO ANNUAL REPORT 2009 Management’s Discussion and Analysis Assets, Liabilities and Net Assets ($197,161 thousand). However, the appreciation of the yen [Assets] resulted in negative foreign currency translation adjustments As of March 31, 2009, total assets decreased 10.3 percent totaling ¥31,363 million ($319,184 thousand), and unrealized compared with the previous fiscal year-end to ¥606,569 million gains on available-for-sale securities, net of taxes decreased ($6,173,102 thousand). ¥4,921 million ($50,082 thousand) from a year earlier. Cash divi- Current assets decreased 11.4 percent compared with the pre- dend from retained earnings totaled ¥16,982 million ($172,827 vious fiscal year-end to ¥316,996 million ($3,226,094 thou- thousand). Finally, the acquisition of treasury stock totaling sand). Factors included a decrease in cash and time deposits and ¥6,546 million ($66,619 thousand) further reduced net assets. reduction in the yen value of current assets denominated in As a result, as of March 31, 2009 net assets per share foreign currencies as a result of the yen’s appreciation versus decreased ¥106.3 compared with the previous fiscal year-end to major currencies as of the balance sheet date. ¥839.9 ($8.55). The equity ratio decreased 1.0 percentage Investments and other assets decreased 5.6 percent com- point to 55.6 percent from 56.6 percent a year earlier. pared with the previous fiscal year-end to ¥115,934 million ($1,179,870 thousand), mainly due to lower market prices for Total Assets/Operating ROA (%) 10 (Billions of yen) 800 investments in securities. Property, plant and equipment, net of accumulated deprecia- 600 7.5 400 5 200 2.5 tion, decreased 4.2 percent compared with the previous fiscal year-end to ¥138,233 million ($1,406,808 thousand). This decrease resulted despite the inclusion of lease assets as a result of the adoption of a new accounting standard in Japan for 0 0 lease transactions, because of normal depreciation and reduction in the yen value of property, plant and equipment denominated in foreign currencies as a result of the yen’s appreciation as of the balance sheet date. Intangible assets decreased 30.5 percent compared with 2005 2006 2007 2008 2009 701.1 671.8 739.8 675.9 606.6 4.3 5.9 7.4 9.4 8.2 Total Assets Operating ROA Net Assets/ Interest-bearing Debt the previous fiscal year-end to ¥35,406 million ($360,330 thousand). Factors included the retroactive amortization of (Billions of yen) 400 300 goodwill at foreign subsidiaries as a result of the adoption a new 200 accounting standard in Japan and the recognition of impairment of goodwill and trademark rights associated with the 100 DECLÉOR brand. 0 2005 [Liabilities] Total liabilities as of March 31, 2009 decreased 7.8 percent Net Assets Interest-bearing Debt 2006 2007 2008 2009 370.0 387.6 403.8 399.7 352.0 94.3 82.3 127.8 63.2 62.1 compared with the previous fiscal year-end to ¥254,618 million ($2,591,268 thousand). Interest-bearing debt decreased 1.8 percent compared with the previous fiscal year-end to ¥62,053 Equity Ratio/ Debt-Equity Ratio million ($631,519 thousand). It includes short- and long-term (%) 100 (Times) 1.00 75 0.75 50 0.50 25 0.25 debt and, beginning with the fiscal year ended March 31, 2009, lease liabilities. The redemption of ¥6,849 million in medium-term notes issued by a U.S. subsidiary more than offset the inclusion of lease liabilities on the balance sheets. The current 0 portion of long-term debt includes ¥20.0 billion in 1.12% unsecured yen bonds due in March 2010. 0 2005 Equity Ratio (Left scale) Debt-Equity Ratio (Right scale) 2006 2007 2008 2009 51.2 55.7 52.5 56.6 55.6 0.26 0.22 0.32 0.16 0.18 [Net Assets] Total net assets as of March 31, 2009 decreased 12.0 percent compared with the previous fiscal year-end to ¥351,951 million ($3,581,834 thousand). Net income totaled ¥19,373 million SHISEIDO ANNUAL REPORT 2009 47 Cash Flows Cash Flows from Financing Activities Cash and cash equivalents (net cash) as of March 31, 2009 Net cash used in financing activities totaled ¥32,283 million totaled ¥91,858 million ($934,846 thousand), a decrease of ($328,547 thousand). Primary uses of cash included ¥16,972 mil- ¥28,536 million compared with the previous fiscal year-end. lion ($172,726 thousand) for cash dividend paid and the use of ¥6,546 million ($66,619 thousand) for the acquisition of treasury Cash Flow Summary (Billions of yen) stock. 2007 2008 2009 Cash flows from operating activities 69.4 75.3 42.8 Cash flows from investing activities (18.5) (5.8) (28.2) global customers’ beauty and health, Shiseido conducts R&D 1.8 (95.9) (32.3) activities in five locations worldwide, with two research centers in 145.3 120.4 91.9 Cash flows from financing activities Cash and cash equivalents at end of year Research and Development To develop superior products and offer services that support Yokohama, Kanagawa Prefecture, Japan, the Beauty Solution Development Center in Shinagawa Ward, Tokyo, Japan, and research facilities in the Americas (the United States), Europe (France), and Asia (China and Thailand). During the fiscal year Cash Flows from Operating Activities Net cash provided by operating activities totaled ¥42,768 ended March 31, 2009, awards such as the Grand Prize in the Oral million ($435,253 thousand). Income before income taxes of Presentation category at the 2008 Congress in Barcelona of the ¥38,486 million ($391,675 thousand) and depreciation of International Federation of the Societies of Cosmetic Chemists ¥28,289 million ($287,900 thousand) contributed to cash provided (IFSCC), the world’s most authoritative congress for cosmetics by operations. Uses of cash included income taxes paid of science and technology, demonstrated the regard the international ¥17,542 million ($178,527 thousand) and increase in inventories community holds for Shiseido technology. In the fiscal year under review, R&D expenses for the of ¥10,340 million ($105,231 thousand). Shiseido Group totaled ¥15,243 million ($155,129 thousand), Cash Flows from Operating Activities/Acquisition of Fixed Assets (Property, Plant and Equipment + Intangible Assets + Long-term Prepaid Expenses) (Billions of yen) 80 and represented 2.2 percent of net sales. R&D objectives, primary initiatives, results and expenses by business segment were as follows. R&D expenses include basic research costs and other expenses totaling ¥5,207 million ($52,992 thousand) that cannot 60 be allocated to specific businesses. 40 Domestic Cosmetics 20 With the goal of contributing to beautiful skin and beautiful lifestyles, Shiseido conducts research in basic dermatology 0 2005 2006 2007 2008 2009 Cash Flows from Operating Activities 52.4 21.8 69.4 75.3 42.8 Acquisition of Fixed Assets 30.0 27.5 28.6 27.7 28.2 and interface science. The broad range of Shiseido’s R&D activities includes developing cosmetic ingredients, developing and evaluating products, and developing beauty methods. For the skin care line Revital Granas, Shiseido conducted Cash Flows from Investing Activities detailed studies on more than 600 varieties of ingredients Net cash used in investing activities totaled ¥28,158 million derived from plants over eight years to develop such new ($286,566 thousand). Acquisition of fixed assets, calculated as the Shiseido original ingredients as winged bean seed extract. sum of acquisition of property, plant and equipment, intangible Shiseido then compounded selected ingredients using cut- assets excluding goodwill, and long-term prepaid expenses, ting-edge technology to develop a new anti-aging skin care totaled ¥28,223 million ($287,228 thousand), which was about the product that makes skin firm and beautiful. same level as depreciation. Shiseido mainly used capital expen- On the other hand, after many years of research into skin ditures for the restoration and renewal of existing facilities in blemishes, Shiseido discovered that a large amount of Japan and overseas, and to construct facilities such as a new fac- melanin takes away the regenerative power of skin, and the tory in Vietnam. Net cash used in investing activities increased melanin that accumulates on the back of skin that becomes compared to the previous fiscal year in part because of the blemished has unique functions. Shiseido put this discovery absence of proceeds from sales of property, plant and equip- to use developing HAKU Melanofocus EX, which encourages ment generated through the sale of logistics and product center smooth melanin emission to support the regenerative power of facilities in the fiscal year ended March 31, 2008. skin for smooth, blemish-free skin that is clear and white. 48 SHISEIDO ANNUAL REPORT 2009 Management’s Discussion and Analysis In addition, Shiseido has developed a totally new spherical R&D Expenses/Ratio of R&D Expenses to Net Sales (Billions of yen) 20 pearlizing agent with a highly light-diffusing effect that diminishes (%) 4 the appearance of lip wrinkles, and is using it in lipstick in the Maquillage makeup line. Furthermore, Shiseido conducted joint research with a fiber 15 3 10 2 5 1 manufacturer to develop a new compound using a sustained motion fiber that employs instant adhesion technology, and applied it to develop UNO Power Motion, a hair styling agent that 0 combines a light finish with powerful, long-lasting styling. In the health care business, Shiseido discovered an amura 0 2005 2006 2007 2008 2009 R&D Expenses 16.8 16.5 16.1 14.6 15.2 Ratio of R&D Expenses to Net Sales 2.6 2.5 2.3 2.0 2.2 fruit extract that maintains elastic collagen, and is using it in the Collagen brand of beauty supplements that help bring out beauty. R&D expenses for the fiscal year ended March 31, 2009 in the thousand). Outlook for the Fiscal Year Ending March 31, 2010 Overseas Cosmetics remain challenging, both domestically and overseas, because of domestic cosmetics segment totaled ¥7,817 million ($79,554 Market conditions surrounding the Shiseido Group will Aiming for “high quality, high image and high service” in the ongoing global recession. Nonetheless, the Group will overseas cosmetics brands, Shiseido develops products that work in concert to implement its Three-Year Plan for the period fully capitalize on high-quality, high-performance ingredients. from the fiscal year ended March 31, 2009 through the fiscal year During the fiscal year ended March 31, 2009, Shiseido developed SHISEIDO Perfect Rouge that delivers true, clear ending March 31, 2011 aimed at building a foundation for sustained medium- and long-term growth. color. Shiseido employed coating technology to eliminate the dif- In the fiscal year ending March 31, 2010, Shiseido expects ference in the color makeup appears to have and the color it has market conditions in Japan and overseas to remain as difficult as when applied and combined it with Micromatic Color Pigment, they were in the year under review. Anticipating recovery which keeps color from becoming dull over time. The com- from the fiscal year ending March 31, 2011, Shiseido will pound uses Trans Red pigment, which functions to create focus on strengthening its basic foundation so that it can clear, beautiful red by transforming the emission of light from col- return to growth as quickly as possible. Rather than change ors other than red to red. the vision, strategies, and implementation agenda of the R&D expenses for the fiscal year ended March 31, 2009 in the Three-Year Plan, Shiseido will work to raise its market com- overseas cosmetics segment totaled ¥2,017 million ($20,527 petitiveness and profitability under its stepped-up distinction thousand). and concentration strategy. Shiseido expects net sales to fall below the level of the fiscal year Others ended March 31, 2009 due to contraction in the domestic market The frontier sciences division conducts R&D in areas including and the effect of the yen’s appreciation on overseas sales. In medical-use drugs, cosmetics raw materials, chromatography, contrast, Shiseido expects operating income to remain at about the and cosmetic dermatology treatments. same level as the fiscal year ended March 31, 2009 because During the fiscal year ended March 31, 2009, Shiseido devel- efforts to enhance cost efficiency and reduce sales costs and oped a new surface preparation agent that has phosphoryl- business expenses should compensate for a further increase in choline Moreover, pension-related costs. Shiseido also forecasts that net income Shiseido integrated this finishing agent with powder surface with extremely hydrophilic behavior. will increase in the fiscal year ending March 31, 2010 because of preparation technology used in cosmetics technology to develop decreases in other expenses and income taxes. a new column packing material for the columns used in high-speed For the year ending March 31, 2010, Shiseido forecasts that liquid chromatography for analyzing ingredients in areas including consolidated net sales will decrease 5.8 percent year on year to cosmetics, pharmaceuticals, foods and clinical testing. As a ¥650 billion, operating income will increase 0.2 percent to ¥50 result, it can detect hydrophilic substances that conventional billion, and net income will increase 60.0 percent to ¥31 billion. column packing materials had difficulty measuring, which raises The outlook by business segment follows below. analytical accuracy while shortening analysis time. R&D expenses for the fiscal year ended March 31, 2009 in other businesses totaled ¥202 million ($2,056 thousand). Domestic Cosmetics In the fiscal year ending March 31, 2010, Shiseido is targeting a year-on-year sales increase in the healthcare division. SHISEIDO ANNUAL REPORT 2009 49 However, Shiseido expects sales in the cosmetics division to For other businesses, Shiseido forecasts decreases in both decline because of continued challenging market conditions, sales and operating income, due mainly to the withdrawal of The and sales in the professional division to remain relatively Ginza Co., Ltd. from the boutique business at the end of unchanged. March 2009. In the cosmetics division, Shiseido will concentrate on the two pillars of mega lines and relationship building brands/lines Overseas Sales with meticulous efforts to match brands/lines being nurtured and Shiseido expects China to drive continued sales growth in sales channels while honing the focus on core fields. At the Asia-Oceania. Due to economic contraction, however, sales in same time, Shiseido will reinforce its fundamental sales capa- Europe and North America will be sluggish. Shiseido expects bilities and upgrade its product information and sales-counter total overseas sales to increase 5 percent year on year on a local activities. In the professional division, Shiseido expects ongoing currency basis, but to decrease on a yen basis due to the sales reforms to maintain sales at the same level as in the fiscal yen’s appreciation. year ended March 31, 2009. In the healthcare division, Shiseido will work to further increase sales through various initiatives, including a focused effort to nurture Collagen. Shiseido expects lower sales in the cosmetics division to result in a decrease in overall sales in the Domestic Cosmetics business segment. Although the decrease in sales will reduce the operating margin, Shiseido will manage expenses efficiently and rigorously reassess business expenses under its stepped-up distinction and concentration strategy. Shiseido therefore expects segment operating income to The above outlook is based on the assumption that domestic real GDP will contract approximately 4 to 5 percent in the fiscal year. Based on Ministry of Economy, Trade and Industry statistics for cosmetics shipments, Shiseido estimates that demand for cosmetics products will decrease by 2 to 3 percent. Our forecasts are based on exchange rates of ¥90 per U.S. dollar, ¥120 per euro and ¥13.5 per Chinese yuan. Income Distribution Policy The total shareholder return policy of Shiseido Co., Ltd. aims to increase year on year. maximize returns to shareholders through direct means, in addition to generating medium- and long-term share price Overseas Cosmetics Shiseido expects growth in China despite the global recession, and will therefore reinforce its makeup lines for department stores while expanding its network of cosmetic specialty stores and adopting measures to boost sales at existing stores. Outside of China, Shiseido will seek to maintain growth by innovating the global brand , advancing its “City Concept” strategy, and cultivating new markets. Due to the impact of economic recession, Shiseido expects the rate of overall growth in overseas sales to slow down, but forecasts that overseas sales will increase year on year on a local currency basis due to the initiatives discussed above. However, the sharp appreciation of the yen forecast for the fiscal year ending March 31, 2010 will cause overseas sales to decrease year on year on a yen basis. Shiseido expects operating income from the Overseas Cosmetics business segment to decrease on a yen basis because of continued future-oriented expenditures in tandem with slower sales growth and the negative impact of the yen’s significant appreciation. gains. To this end, in allocating internal capital resources, we prioritize (a) strategic investments linked to renewed growth, and (b) stable dividends and flexible implementation of share buybacks. We have established a 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. We hope to achieve a 60 percent total return ratio in the medium term. Going forward, Shiseido will emphasize dividends while flexibly buying back and retiring shares. For the fiscal year ended March 31, 2009, Shiseido Co., Ltd. increased the cash dividend per share by ¥16 to ¥50 ($0.51), consisting of an interim cash dividend of ¥25 ($0.25) per share and a year-end cash dividend of ¥25 ($0.25) per share. In addition, based on a resolution of the Board of Directors on October 30, 2008, Shiseido bought back 2,211 thousand shares at a cost of ¥4,488 million ($45,675 thousand), which raised the total return ratio to 127.2 percent from 108.8 percent for the previous fiscal year. For the fiscal year ending March 31, 2010, Shiseido plans to pay an interim and year-end dividend of ¥25 per share Others Going forward, Shiseido will continue working to expand its presence in the frontier sciences division, which includes medical-use drugs, cosmetics raw materials, chromatography, and cosmetic dermatology treatment. each, which will maintain the annual cash dividend at ¥50 per share. Business and Other Risks The various risks that could potentially affect the business performance and financial position of Shiseido are summarized below. We feel that these risks could have a major impact on 50 SHISEIDO ANNUAL REPORT 2009 Management’s Discussion and Analysis investors’ decisions. Items that deal with future events are mergers and acquisitions and expanding market share by exe- based on our judgment as of June 24, 2009, the date of issue for cuting marketing activities to raise consumer awareness of this annual report. Please note that the potential risks are not lim- their brands. Consequently, inability to respond to this com- ited to those listed below. petitive environment as effectively as global competitors could negatively affect Shiseido’s business performance and 1. Decrease in Value of the Corporate Brand The corporate brand is shared by all Group com- financial position. 5. Overseas Business Activities panies in Shiseido’s domestic and overseas business activi- Shiseido conducts business in 70 countries and regions ties. We will continue working to enhance the value of this overseas, and overseas sales account for a growing percentage brand, but a decline in the brand’s value from an unforeseen of consolidated net sales each year, totaling 38.0 percent in event could negatively affect Shiseido’s business perform- the fiscal year under review. In the course of conducting over- ance and financial position. seas business, Shiseido’s business performance and financial position could negatively be affected by various factors. 2. Customer Services These include the occurrence of sudden and unpredictable Shiseido places high priority on its relationships with cus- economic, political and social crises; terrorism, war and civil tomers. Chapter 1 of The Shiseido Code (Corporate Ethics war; economic and civil upheaval resulting from the spread of and Behavior Standards) clearly states that we shall act in a contagious diseases such as new strains of influenza; and manner that earns the satisfaction and trust of customers, severe or abnormal weather. and we will continue working to ensure that all employees are aware of these standards. However, an unforeseen event 6. Market Risk could cause loss of such satisfaction and trust, leading to a [Raw material prices] decline in the value of Shiseido Group brands. Shiseido’s International market conditions affect the price of raw materials business performance and financial position could negatively be used in Shiseido products. Factors affecting market conditions affected as a result. include geopolitical risk, the impact on supply and demand from increasing demand in developing countries and speculative capi- 3. Strategic Investment Activities tal flows, weather abnormalities and changes in exchange When making decisions about investments in strategic mar- rates. Shiseido constantly works to limit the impact of rising kets, such as China and Russia, and strategic investments in raw material prices by reducing cost of sales and other means. mergers and acquisitions, new businesses and new markets, However, changes in market conditions and prices that exceed Shiseido endeavors to collect sufficient information and projections could negatively affect Shiseido’s business per- undertake due diligence prior to making rational judgments. formance and financial position. Due to various unforeseeable factors that may cause the [Exchange rates] operating environment to deteriorate, however, we may not Export, import and other transactions denominated in foreign achieve the results originally anticipated. This could negatively currencies expose Shiseido to foreign exchange rate risk. affect Shiseido’s business performance and financial position. Although we hedge foreign exchange rate risk through means such as limiting export and import transactions by establishing pro- 4. The Competitive Environment of the Cosmetics Industry duction bases to serve local markets, we are unable to completely eliminate risk. Moreover, the financial statements of Shiseido operates in the cosmetics industry, in which com- consolidated subsidiaries and equity affiliates domiciled over- petition is intensifying on a global scale. Zero sum competi- seas are denominated in local currencies that are translated into tion for share among Japanese cosmetic companies in the yen upon inclusion in the consolidated financial statements. mature domestic market is intensifying because of factors This has the potential to exert a negative impact on operating per- including the expanding influence of global U.S. and European formance if the yen appreciates versus foreign currencies when corporations in the prestige market, and the entry of new revenues exceed expenses. Moreover, the Shiseido Group’s competitors from other industries. In addition, in overseas investments in overseas subsidiaries and equity affiliates are markets such as China, which Shiseido has positioned as a subject to foreign currency translation adjustments that reduce pillar of its growth strategy, and Russia, the competitive envi- shareholders’ equity if the yen strengthens. Foreign exchange fluc- ronment is becoming increasingly challenging as well-capitalized tuations that exceed assumptions could negatively affect U.S. and European corporations are aggressively conducting Shiseido’s business performance and financial position. SHISEIDO ANNUAL REPORT 2009 51 11. Information Security Risk [Stock prices] As of March 31, 2009, Shiseido held shares and is therefore Shiseido takes various measures aimed at protecting its exposed to the risk of changes in share price, which can information assets, which include customers’ personal infor- increase or decrease unrealized gains or losses and expose mation and industrial secrets. For example, in April 2005, the Shiseido to the risk of impairment losses. In addition, a portion Personal Information Protection Law was fully enacted in of the pension plan assets of Shiseido’s retirement benefit Japan. In anticipation of this, Shiseido Co., Ltd. in March 2004 plan is invested in shares with a market price. Lower share obtained Privacy Mark certification, a Japanese Industrial prices could therefore reduce pension plan assets and negatively Standard that recognizes the appropriateness of a company’s affect operating performance by increasing retirement benefit systems for protecting personal information. However, expenses. Unforeseen situations such as this could negatively unforeseeable events, such as leakage of information due to affect Shiseido’s business performance and financial position. unauthorized access, could negatively affect Shiseido’s business performance and financial position. 7. Responding Appropriately to Market Needs Shiseido’s ability to develop and cultivate products and 12. Natural Disasters and Accidents brands/lines and to conduct marketing activities that respond Shiseido has developed a business continuation plan covering appropriately to market needs exerts a significant impact on its sales issues critical to the continued operation of production bases, dis- and earnings. To respond to market needs, we continuously tribution bases, information systems and the head office to develop appealing new products and brands/lines; reinforce and cul- minimize loss due to interruption of production, distribution or tivate new and existing products and brands/lines through marketing sales resulting from the occurrence of a natural disaster or activities; and withdraw existing products and brands/lines that accident, such as a major earthquake. However, a natural disaster no longer meet market needs. However, by nature these activities or accident that exceeds the assumptions of this plan and dis- entail uncertainties that may prevent Shiseido from achieving its rupts production, distribution or sales could negatively affect intended results, which could negatively affect Shiseido’s business Shiseido’s business performance and financial position. performance and financial position. Fundamental Policy on Control of the Company 8. Specific Business Partners Significant changes are taking place in retail and wholesale distribution channels in Shiseido’s core domestic cosmetics busi- At its Board of Directors meeting held on April 27, 2006, ness. Failure to respond effectively to these changes could the Company established a basic policy regarding control negatively over the Company (the “Basic Policy”) and a plan for counter- affect Shiseido’s business performance and financial position. measures against large-scale acquisitions of its shares (known as an advance warning rights plan; hereinafter, the 9. Regulatory Risk “Plan”). Shiseido is subject to a range of domestic and overseas legal The 106th Ordinary General Meeting of Shareholders provisions in the course of conducting its business. These held on June 29, 2006 resolved to implement the Plan, with include pharmaceuticals laws, as well as quality-related stan- Article 15, Resolution 3 of the Articles of Incorporation serving dards, environmental standards, accounting standards, and tax reg- as the basis for introducing the Plan, and Resolution 7 stipu- ulations. We aspire to be completely ethical based on legal lating its contents. compliance and corporate social responsibility. However, future However, the Plan was scheduled to end at the close of regulatory changes or the establishment of unanticipated new reg- the 108th Ordinary General Meeting of Shareholders held ulations may limit Shiseido’s activities, which could negatively on June 25, 2008. Therefore, on April 30, 2008 the Board of affect Shiseido’s business performance and financial position. Directors resolved to revoke the Basic Policy and discontinue the Plan from the close of the 108th Ordinary General 10. Material Litigation Meeting of Shareholders because steady implementation of In the fiscal year ended March 31, 2009, Shiseido was not the Three-Year Plan from the fiscal year ended March 31, involved in material litigation other than the litigation discussed 2009 would increase competitiveness in global markets and in Notes to the Consolidated Financial Statements, “9. sustained growth potential, maximize corporate value and Contingent Liabilities.” In the future, unfavorable judgments secure and increase profits shared with shareholders. resulting from material litigation could negatively affect Consequently, in accordance with Resolution 2, the 108th Shiseido’s business performance and financial position. 52 SHISEIDO ANNUAL REPORT 2009 Management’s Discussion and Analysis Ordinary General Meeting of Shareholders resolved to eliminate the Article of Incorporation that served as the basis for introducing the Plan. Investments in Securities Shiseido recognizes impairment for securities reported as available-for-sale securities for which fair value or market price has fallen substantially below acquisition cost. Securities deemed recoverable are excluded. Securities with a fair value that is Significant Accounting Estimates more than 50 percent below acquisition cost as of the balance Shiseido prepares its consolidated financial statements in sheet date are deemed unrecoverable. The recoverability of accordance with accounting principles generally accepted in securities with a fair value from 30 to 50 percent below acquisi- Japan. In preparing these financial statements, we select and tion cost is evaluated according to the performance and financial apply accounting policies and necessarily make estimates that condition of the issuing entity. Impairment is recognized for affect the presentation of reported amounts for assets, liabilities, securities for which fair value is not available if current net revenue and expenses. We consider information including his- asset value per share according to the financial condition of the torical data in making rational estimates. However, due to the issuing entity is more than 50 percent below net asset value per unpredictable nature of these estimates, actual results share at the time of acquisition. Securities deemed recover- may vary. able are excluded. We consider the estimates of recoverability to Shiseido considers the following significant accounting policies be appropriate. However, in the future the market price of to exert a large effect on key decisions regarding the esti- securities deemed recoverable may decrease and the perform- mates used in the consolidated financial statements. ance and financial condition of the issuing entity may deteriorate. This could require us to recognize impairment losses. Property, Plant and Equipment Shiseido reviews fixed assets, primarily property, plant and Deferred Tax Assets equipment, for impairment whenever circumstances indicate that Shiseido has established an allowance for deferred tax their carrying value may not be recoverable. Business-use assets deemed unrecoverable using appropriate deferred tax assets are pooled by business division to estimate future cash asset accounting. Historical data and future projections are flow, and the net sales value of idle assets is estimated for used to evaluate the recoverability of deferred tax assets to each separate property. Based on these estimates, assets are sufficiently determine taxable status. We consider these to be devalued from book value to recoverable value. We consider appropriate. However, unpredictable factors could cause information including estimates of future cash flow and recov- changes in underlying assumptions that could reduce or eliminate erable value in making rational estimates. However, unpre- deferred tax assets. This could require us to provide additional dictable factors could cause changes in the underlying allowances for deferred tax assets. assumptions of these estimates. This could change our estimates, decrease future cash flow and recoverable value, and require us to recognize impairment losses. Retirement Benefits and Obligations Shiseido’s domestic retirement benefit plans consist primarily of corporate pension plans and termination allowance plans. Goodwill and Other Intangible Assets Employee benefits and obligations are calculated based on Shiseido reviews goodwill and other intangible assets for assumptions including discount rate, employee turnover rate, impairment. Shiseido employs the opinions of external experts and mortality rate and projected rate of return on pension plan other data in estimating fair value and examining impairment. assets. These assumptions are revised annually. Discount The discounted cash flow method primarily used to estimate fair rate and expected return on plan assets are two critical value relies extensively on estimates and assumptions regarding assumptions in determining benefits and obligations. The dis- future cash flow and discount rate. These estimates and count rate is determined with reference to the market rate for assumptions may significantly affect measurement and recognition long-term fixed-rate bonds that carry little or no risk. Expected of the amount of impairment. We consider the estimates of fair return on pension plan assets is determined based on an value used for measuring impairment to be rational. However, expected weighted-average return for the various types of unforeseen changes to the underlying assumptions of these assets held within the plan. We consider these assumptions to estimates could occur. This could reduce fair value and require us be appropriate. However, actual results may vary and changes in to recognize impairment losses. the underlying assumptions could occur. This could affect pension costs and obligations. SHISEIDO ANNUAL REPORT 2009 53 Consolidated Financial Statements CONSOLIDATED BALANCE SHEETS Shiseido Company, Limited, and Subsidiaries March 31, 2008 and 2009 Thousands of U.S. dollars (Note 1) Millions of yen 2008 2009 2009 ASSETS Current Assets: ¥ 67,413 65,075 ¥ 57,411 47,344 $ 584,276 481,824 111,072 44 111,116 102,018 2 102,020 1,038,246 20 1,038,266 Less: allowance for doubtful accounts ·························· (1,495) 109,621 (1,035) 100,985 (10,534) 1,027,732 Inventories (Note 5) ······················································ Deferred tax assets (Note 8) ·········································· Other current assets (Note 13) ······································· 68,486 29,455 17,657 68,330 26,229 16,697 695,400 266,935 169,927 Total current assets ··············································· 357,707 316,996 3,226,094 38,377 32,628 332,058 1,404 35,159 10,419 10,944 26,558 1,302 34,360 11,313 12,092 24,239 13,251 349,685 115,133 123,061 246,682 122,861 115,934 1,179,870 Buildings and structures (Note 6) ···································· Machinery and equipment ············································· Lease assets ······························································· 168,343 135,975 — 304,318 161,018 128,891 10,840 300,749 1,638,693 1,311,734 110,320 3,060,747 Less: accumulated depreciation ······································ (201,624) 102,694 (201,837) 98,912 (2,054,112) 1,006,635 Land ·········································································· Construction in progress ··············································· 40,290 1,374 38,185 1,136 388,612 11,561 Total property, plant and equipment ·························· 144,358 138,233 1,406,808 Intangible Assets (Note 16): Goodwill ····································································· Lease assets ······························································· Other intangible assets ················································· 22,194 — 28,744 12,198 208 23,000 124,140 2,117 234,073 Total intangible assets················································ 50,938 35,406 360,330 Total Assets ········································································ ¥ 675,864 ¥ 606,569 $ 6,173,102 Cash and time deposits (Notes 3 and 6) ··························· Short-term investments in securities (Notes 3 and 4) ········· Notes and accounts receivable: Trade ······································································ Unconsolidated subsidiaries and affiliates ····················· Investments and Other Assets (Note 16): Investments in securities (Notes 4 and 6) ························· Investments in and advances to unconsolidated subsidiaries and affiliates ··················· Prepaid pension expenses (Note 7) ································· Long-term prepaid expenses ·········································· Deferred tax assets (Note 8) ·········································· Other investments (Note 6) ··········································· Total investments and other assets ·························· Property, Plant and Equipment, at Cost (Note 16): The accompanying notes are an integral part of the financial statements. 54 SHISEIDO ANNUAL REPORT 2009 Thousands of U.S. dollars (Note 1) Millions of yen 2008 LIABILITIES AND NET ASSETS Current Liabilities: Short-term debt (Note 6) ··············································· Current portion of long-term debt (Note 6) ························ Notes and accounts payable: Trade ······································································ Unconsolidated subsidiaries and affiliates ····················· ¥ 4,704 33,949 2009 ¥ 4,528 23,073 2009 $ 46,082 234,816 57,294 1,040 58,334 51,862 851 52,713 527,804 8,660 536,464 Other payables (Note 13) ··············································· Accrued income taxes ·················································· Reserve for sales returns··············································· Accrued bonuses for employees····································· Accrued bonuses for directors ········································ Provision for liabilities and charges ·································· Deferred tax liabilities (Note 8)········································ Other current liabilities ·················································· Total current liabilities ············································· 56,108 9,030 7,945 12,417 110 888 4 22,500 205,989 47,006 5,307 11,062 9,563 120 634 9 20,083 174,098 478,384 54,010 112,579 97,323 1,221 6,452 92 204,386 1,771,809 Long-Term Liabilities: Long-term debt (Note 6) ················································ Accrued retirement benefits (Note 7)······························· Allowance for losses on guarantees ································ Deferred tax liabilities (Note 8)········································ Other long-term liabilities··············································· Total long-term liabilities ········································· Total Liabilities ···················································· 24,566 38,302 350 3,797 3,121 70,136 276,125 34,452 39,271 350 3,822 2,625 80,520 254,618 350,621 399,664 3,562 38,897 26,715 819,459 2,591,268 64,507 64,507 656,493 70,258 248,921 (11,197) 70,258 245,545 (16,840) 715,021 2,498,932 (171,382) 372,489 363,470 3,699,064 5,274 (57) 4,764 9,981 154 17,115 399,739 ¥675,864 353 — (26,599) (26,246) 256 14,471 351,951 ¥606,569 3,592 — (270,700) (267,108) 2,605 147,273 3,581,834 $6,173,102 CONTINGENT LIABILITIES (Note 9) NET ASSETS (Note 10) Shareholders’ Equity: Common stock ························································· Authorized: 1,200,000,000 shares as of March 31, 2008 and 2009 Issued: 410,000,000 shares as of March 31, 2008 and 2009 Capital surplus ·························································· Retained earnings ····················································· Less: treasury stock, at cost ······································· Treasury stock: 5,794,022 shares as of March 31, 2008 and 8,489,386 shares as of March 31, 2009 Total shareholders’ equity ·············································· Valuation, Translation Adjustments and Others: Unrealized gains (losses) on available-for-sale securities, net of taxes (Note 4) ················································ Deferred losses on hedges, net of taxes ······················· Foreign currency translation adjustments ······················ Total valuation, translation adjustments and others ············ Stock Acquisition Rights (Note 11) ······························· Minority Interests in Consolidated Subsidiaries ············· Total Net Assets ··················································· Total Liabilities and Net Assets ·········································· SHISEIDO ANNUAL REPORT 2009 55 CONSOLIDATED STATEMENTS OF INCOME Shiseido Company, Limited, and Subsidiaries For the years ended March 31, 2007, 2008 and 2009 Thousands of U.S. dollars (Note 1) Millions of yen 2007 2008 2009 2009 Net Sales (Note 18) ················································· ¥694,594 ¥723,485 ¥690,256 $7,024,791 Cost of Sales ······················································ Gross profit ··················································· 185,533 509,061 186,466 537,019 171,752 518,504 1,747,934 5,276,857 Selling, General and Administrative Expenses (Note 12) ····· Operating Income (Note 18) ···························· 459,056 50,005 473,554 63,465 468,590 49,914 4,768,878 507,979 2,169 (1,881) 86 58 143 (20) 2,977 (1,882) (1,649) 149 422 3,097 2,821 (1,812) (275) 58 24 71 28,710 (18,441) (2,799) 590 244 723 (28) (96) (206) (2,096) 734 (4,598) (1,102) — (154) (1,151) (598) (1,083) (884) (6,073) (6,074) — (8,997) (61,805) (61,816) — — 2,200 (2,239) 47,766 — 2,028 2,060 65,525 (216) 1,138 (11,428) 38,486 (2,198) 11,581 (116,304) 391,675 Income before minority interests·························· 13,660 5,515 19,175 28,591 16,507 9,063 25,570 39,955 12,028 3,109 15,137 23,349 122,410 31,640 154,050 237,625 Minority Interests in Net Income of Consolidated Subsidiaries ························· (3,298) (4,495) (3,976) (40,464) Net income ············································ ¥ 25,293 ¥ 35,460 Other Income (Expenses): Interest and dividend income ······························ Interest expense ··············································· Foreign exchange gain (loss) ······························· Equity in earnings of affiliates ······························ Gain (loss) on sales of investments in securities (Note 4) ··· Gain (loss) on sales of shares in affiliates················ Write-down of investments in securities and other investments ······················· Gain (loss) on sales and disposal of property, plant and equipment ········································ Impairment loss (Notes 16 and 18) ························· Restructuring expenses (Note 17) ························ Additional retirement benefits (Note 7) ··················· Loss on adjustment for changes of accounting standard for lease transactions ···························· Other, net ························································ Income before income taxes ··························· Income Taxes (Note 8) Current ···························································· Deferred ·························································· ¥ 19,373 Yen U.S. dollars (Note 1) Per Share Net income — basic ············································· — fully diluted ································· Cash dividend ··················································· ¥60.9 60.7 32.0 ¥86.1 85.7 34.0 ¥48.0 48.0 50.0 Weighted Average Number of Shares (thousands) ····· 412,572 407,696 403,240 The accompanying notes are an integral part of the financial statements. 56 SHISEIDO ANNUAL REPORT 2009 $ 197,161 $0.49 0.49 0.51 Consolidated Financial Statements CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS Shiseido Company, Limited, and Subsidiaries For the years ended March 31, 2007, 2008 and 2009 Thousands Number of shares of common stock Balance as of March 31, 2006 ········ Net income for the year ended March 31, 2007 ··· Cash dividend from retained earnings as appropriation of earnings ·················· Directors’ bonuses as appropriation of earnings··· Interim cash dividend from retained earnings ···· Other decreases in retained earnings ·· Acquisition of treasury stock ········· Disposal of treasury stock ············· Change in scope of consolidation ···· Change in unrealized gains (losses) on available-for-sale securities, net of taxes ·· Change in fair market value of derivatives, net of taxes ················· Change in foreign currency translation adjustments················ Issuance of stock acquisition rights ·· Increase in minority interests ·········· Balance as of March 31, 2007 ········ Net income for the year ended March 31, 2008 ··· Cash dividend from retained earnings····· Other decreases in retained earnings ·· Acquisition of treasury stock ········· Disposal of treasury stock ············· Retirement of treasury stock ··········· Change in scope of consolidation ········ Change in unrealized gains (losses) on available-for-sale securities, net of taxes ··· Change in fair market value of derivatives, net of taxes ················· Change in foreign currency translation adjustments················ Issuance of stock acquisition rights ··· Increase in minority interests ·········· Balance as of March 31, 2008 ········ Effect of changes in accounting policies applied to foreign subsidiaries ··········· Net income for the year ended March 31, 2009 ··· Cash dividend from retained earnings····· Acquisition of treasury stock ········· Disposal of treasury stock ············· Change in scope of consolidation ········ Change in unrealized gains (losses) on available-for-sale securities, net of taxes ·· Change in fair market value of derivatives, net of taxes ················· Change in foreign currency translation adjustments················ Issuance of stock acquisition rights ··· Increase in minority interests ·········· Balance as of March 31, 2009 ········ Millions of yen Common stock Capital surplus Deferred losses on hedges, net of taxes Foreign currency translation adjustments Stock acquisition rights Minority interests in consolidated subsidiaries 424,562 — ¥64,507 — ¥70,258 — ¥244,768 25,293 ¥(17,159) — ¥18,279 — — — ¥ (6,754) — — — ¥13,714 — — — — — — — — — — — — — — — — — — — — 36 — (6,186) (133) (6,601) (174) — — (1,557) — — — — (697) 960 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (4,535) — — — — — — — — — — (233) — — — — — — 424,562 — — — — — (14,562) — — — — 64,507 — — — — — — — — — — 70,294 — — — — 90 (126) — — — — 255,410 35,460 (13,464) (491) — — (27,880) (114) — — — (16,896) — — — (25,078) 2,771 28,006 — — — — 13,744 — — — — — — — — — — (233) — — — — — — — 8,315 — — 1,561 — — — — — — — — 52 — 52 — — — — — — — — — 1,644 15,358 — — — — — — — — — — — — (8,470) — — — — — — — — — — 176 — — — — — — 410,000 — — — 64,507 — — — 70,258 — — — 248,921 — — — (11,197) — — — 5,274 — — — (57) 3,203 — — 4,764 — 102 — 154 — — 1,757 17,115 — — — — — — — — — — — — — — — — — — (5,386) 19,373 (16,982) — (430) 49 — — — (6,546) 903 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (4,921) — — — — — — — — — — 57 — — — — — — 410,000 — — — ¥64,507 — — — ¥70,258 — — — ¥245,545 — — — ¥(16,840) — — — ¥ 353 — — — — (31,363) — — ¥(26,599) — 102 — ¥256 — — (2,644) ¥14,471 Thousands Number of shares of common stock Balance as of March 31, 2008 ········ Effect of changes in accounting policies applied to foreign subsidiaries ··········· Net income for the year ended March 31, 2009 ··· Cash dividend from retained earnings····· Acquisition of treasury stock ········· Disposal of treasury stock ············· Change in scope of consolidation ······· Change in unrealized gains (losses) on available-for-sale securities, net of taxes ·· Change in fair market value of derivatives, net of taxes ················· Change in foreign currency translation adjustments················ Issuance of stock acquisition rights ··· Increase in minority interests ·········· Balance as of March 31, 2009 ········ Unrealized gains Treasury stock, (losses) on availableat cost for-sale securities, net of taxes Retained earnings Thousands of U.S. dollars (Note 1) Common stock Capital surplus Retained earnings Unrealized gains Treasury stock, (losses) on availableat cost for-sale securities, net of taxes $715,021 $2,533,289 $(113,953) 410,000 $656,493 — — — — — — — — — — — — — — — — — — (54,814) 197,161 (172,827) — (4,376) 499 — — — (66,619) 9,190 — — — — — — — — — — — — — — — — — — (50,082) — — — — — — — — — 410,000 — — — $656,493 — — — — — — — — — $715,021 $2,498,932 $(171,382) — — — $ 3,592 The accompanying notes are an integral part of the financial statements. $53,674 Deferred Foreign currency losses on translation hedges, net adjustments of taxes $(580) $ 48,484 Stock acquisition rights Minority interests in consolidated subsidiaries $1,567 $174,181 — — — — — — — — — — — — — — — — — — — — — — 580 — — — — (319,184) — — — — — $(270,700) — 1,038 — $2,605 — — (26,908) $147,273 SHISEIDO ANNUAL REPORT 2009 57 Consolidated Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS Shiseido Company, Limited, and Subsidiaries For the years ended March 31, 2007, 2008 and 2009 Thousands of U.S. dollars (Note 1) Millions of yen 2007 Cash Flows from Operating Activities: Income before income taxes ······················································ Depreciation ················································································ Amortization of goodwill ····························································· Impairment loss ·········································································· Additional retirement benefits····················································· Restructuring expenses ······························································ Loss on adjustment for changes of accounting standard for lease transactions ································································ Increase (decrease) in allowance for doubtful accounts ············· Increase (decrease) in reserve for sales returns ························· Increase (decrease) in accrued bonuses for employees ············· Increase (decrease) in accrued bonuses for directors················· Increase (decrease) in provision for liabilities and charges ········· Increase (decrease) in accrued retirement benefits···················· (Increase) decrease in prepaid pension expenses ······················ Interest and dividend income······················································ Interest expense ········································································· Equity in earnings of affiliates ····················································· (Gain) loss on sales of investments in securities ························ (Gain) loss on sales of shares in affiliates ··································· Write-down of investments in securities and other investments····· (Gain) loss on sales and disposal of property, plant and equipment ······ (Increase) decrease in notes and accounts receivable················ (Increase) decrease in inventories··············································· Increase (decrease) in notes and accounts payable···················· Payments of accumulated benefits to defined contribution pension plan ··· Other ··························································································· Subtotal ·················································································· Interest and dividend received ···················································· Interest paid ················································································ Income taxes paid ······································································· Net cash provided by operating activities······························· Cash Flows from Investing Activities: Transfers to time deposits ·························································· Proceeds from maturity of time deposits ··································· Acquisition of short-term investments in securities···················· Proceeds from sales of short-term investments in securities ···· Acquisition of investments in securities ····································· Proceeds from sales of investments in securities ······················ Acquisition of property, plant and equipment ····························· Proceeds from sales of property, plant and equipment ·············· Acquisition of intangible assets··················································· Payments of long-term prepaid expenses ·································· Net proceeds from acquisition of shares in subsidiaries resulting in change in consolidation scope ····························· Net proceeds from sales of shares in subsidiaries resulting in change in consolidation scope (Note 3) ··············· Other ··························································································· Net cash used in investing activities ······································ Cash Flows from Financing Activities: Net increase (decrease) in short-term debt································· Proceeds from long-term debt ···················································· Repayment of long-term debt ····················································· Acquisition of treasury stock······················································· Disposal of treasury stock··························································· Cash dividend paid ······································································ Cash dividend paid to minority shareholders ·························· Other ···················································································· Net cash provided by (used in) financing activities················ Effect of Exchange Rate Changes on Cash and Cash Equivalents ···· Net Change in Cash and Cash Equivalents ······························· Cash and Cash Equivalents at Beginning of Year (Note 3) ········ Increase (Decrease) in Cash and Cash Equivalents due to the Change in Consolidation Scope of Subsidiaries ················· Cash and Cash Equivalents at End of Year (Note 3) ·················· The accompanying notes are an integral part of the financial statements. 58 SHISEIDO ANNUAL REPORT 2009 2008 2009 2009 ¥ 38,486 28,289 1,562 6,073 — 6,074 ¥ 47,766 27,876 741 4,598 — 1,102 ¥ 65,525 27,068 785 1,151 1,083 598 — (501) 3,734 — 122 (31) 2,506 (2,018) (2,169) 1,881 (58) (143) 20 28 (734) 1,542 216 (3,756) (2,362) 3,147 83,507 2,151 (2,269) (13,958) 69,431 — 245 (779) 947 (12) (559) 284 (2,940) (2,977) 1,882 (149) (422) (3,097) 96 154 (7,589) 3,954 6,179 (1,841) 1,736 91,322 2,897 (1,925) (16,986) 75,308 216 (230) 2,175 (2,466) 10 (19) 1,990 553 (2,821) 1,812 (58) (24) (71) 206 884 (5,053) (10,340) (4,698) — (3,255) 59,295 2,823 (1,808) (17,542) 42,768 2,198 (2,341) 22,135 (25,097) 102 (193) 20,252 5,628 (28,710) 18,441 (590) (244) (723) 2,096 8,997 (51,425) (105,231) (47,812) — (33,126) 603,450 28,730 (18,400) (178,527) 435,253 (4,519) 1,668 (1,354) 370 (1,725) 9,842 (20,558) 4,161 (2,878) (5,122) (7,093) 1,515 (1,525) 896 (3,349) 9,741 (17,449) 18,711 (5,399) (4,899) (31,738) 27,668 (935) 1,639 (3,816) 3,927 (16,133) 757 (5,671) (6,419) (323,000) 281,580 (9,515) 16,680 (38,836) 39,965 (164,187) 7,704 (57,714) (65,327) — 92 132 1,500 (18,483) 2,411 545 (5,803) 343 2,220 (28,158) 3,491 22,593 (286,566) 854 25,927 (10,977) (697) 995 (12,794) (1,672) 201 1,837 1,930 54,715 89,015 260 2,657 (61,219) (25,078) 2,862 (13,462) (1,982) 79 (95,883) 1,536 (24,842) 145,260 670 28,669 (36,623) (6,546) 473 (16,972) (2,065) 111 (32,283) (10,753) (28,426) 120,394 6,818 291,767 (372,715) (66,619) 4,814 (172,726) (21,016) 1,130 (328,547) (109,434) (289,294) 1,225,260 1,530 ¥145,260 (24) ¥120,394 (110) ¥ 91,858 (1,120) $ 934,846 — $ 391,675 287,900 15,897 61,805 — 61,816 — Notes to the Consolidated Financial Statements Shiseido Company, Limited, and Subsidiaries 1. BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS Accounting Principles and Presentation The financial statements of Shiseido Company, Limited (the “Company”) and its domestic consolidated subsidiaries have been prepared in accordance with the provisions set forth in the Financial Instruments and Exchange Law and Corporate Law and in conformity with accounting principles generally accepted in Japan. The financial statements of the Company’s overseas subsidiaries have been prepared in conformity with generally accepted accounting principles prevailing in the respective countries of domicile in the years ended March 31, 2007 and 2008. Effective from the current fiscal year, the financial statements of the overseas subsidiaries have been prepared in conformity with International Financial Reporting Standards or US GAAP for the Company’s consolidation process, except for certain items which are required to be adjusted in the consolidation process as explained in Note 2(29). The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in Japan, which are different from International Financial Reporting Standards in certain respects as to the application and disclosure requirements. Certain items presented in the consolidated financial statements filed with the Director of the Kanto Finance Bureau in Japan have been reclassified for the convenience of the reader. Certain reclassifications have been made in the consolidated financial statements for the years ended March 31, 2007 and 2008 to conform to the presentation for the year ended March 31, 2009. Amounts in U.S. dollars are included solely for the convenience of the reader. The rate of ¥98.26= US$1 prevailing on March 31, 2009 has been used in translating the consolidated financial statements expressed in Japanese yen into U.S. dollars. Such translations should not be construed as representations that the Japanese yen amounts could be readily converted, realized or settled in U.S. dollars at this rate. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (1) Scope of Consolidation The Company has 91 subsidiaries (companies over which the Company exercises control over operations) as of March 31, 2009 (100 and 96 as of March 31, 2007 and 2008, respectively). The accompanying consolidated financial statements as of March 31, 2009 include the accounts of the Company and its 86 (92 and 91 as of March 31, 2007 and 2008, respectively) significant subsidiaries (the “Companies”). The Company has 20 affiliates (companies that are not subsidiaries but over which the Company exercises significant influence) as of March 31, 2009 (28 and 22 as of March 31, 2007 and 2008, respectively). Investments in 3 affiliates (5 and 3 as of March 31, 2007 and 2008, respectively) are accounted for by the equity method as of March 31, 2009. Shiseido Vietnam Inc. and Shiseido Business Solutions Co., Ltd. were established in the current fiscal year and thus are included in the scope of consolidation in the current fiscal year. Beauté Prestige International Co., Ltd. was liquidated in the current fiscal year and thus was excluded from the scope of consolidation in the current fiscal year. SAHA Asia Pacific Co., Ltd. was excluded from the scope of consolidation in the current fiscal year because it ceased operations and its effect on the consolidated financial statements was immaterial. Shiseido Real Estate Development Co., Ltd. was excluded from the scope of consolidation in the current fiscal year because its shares were sold during the current fiscal year. Shiseido Cosmetics (America) Ltd., NARS Cosmetics, Inc., and ZIC Corporation were acquired by and transferred their business to Shiseido International Corporation (currently Shiseido Americas Corporation), a consolidated subsidiary, in the current fiscal year. Accordingly, those three companies were excluded from the scope of consolidation in the current fiscal year because the effect on the consolidated financial statements became immaterial. Shiseido France S.A. was excluded from the scope of consolidation in the current fiscal year because it was merged with Shiseido Europe S.A.S. during the fiscal year. The major consolidated subsidiaries are listed in “Main Subsidiaries and Affiliates” section on page 38. Since the fiscal year end for certain consolidated subsidiaries is December 31, their financial statements as of that date are used in the preparation of the Company’s consolidated financial statements. When significant transactions occur at those subsidiaries between their fiscal year end and the Company’s fiscal year end, these transactions are included in consolidation. Investments in 5 unconsolidated subsidiaries and 17 affiliates not accounted for under the equity method are stated at cost as they are immaterial to the consolidated financial statements. The Company has adopted the “full fair value method” so that all of the assets and liabilities of the subsidiaries are marked to fair value as of the date of acquisition of control. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profits included in assets resulting from intercompany transactions are eliminated. (2) Inventories Previously, inventories held by the Company for sales in the ordinary course of business were valued at cost, determined by the average method, while inventories held by domestic consolidated subsidiaries were valued at cost, determined primarily by the last purchase price method. Effective from the current fiscal year, the Company has applied “Accounting Standard for Measurement of Inventories”(Accounting Standards Board of Japan (“ASBJ”), Statement No. 9, issued July SHISEIDO ANNUAL REPORT 2009 59 5, 2006) and unified accounting policies between the Company and its consolidated subsidiaries. Accordingly, from the current fiscal year such inventories are mainly valued at cost, determined by the average method (Carrying amount in the balance sheet is calculated with consideration of write-downs due to decreased profitability). The effect of this change on operating income, income before income taxes and net income in the current fiscal year was immaterial. (3) Property, Plant and Equipment (Excluding Lease Assets) Buildings (excluding leasehold improvements) are depreciated using the straight-line method. Other tangible fixed assets are, in principle, depreciated using the declining-balance method at the Company and its domestic consolidated subsidiaries and the straight-line method at overseas consolidated subsidiaries. Major fixed assets in Japan are depreciated over specific useful lives based on durability, level of deterioration, and special characteristics, which represent approximately 20-30% reduction from useful lives for tax purpose. Effective from the year ended March 31, 2008, the Company and its domestic consolidated subsidiaries changed their depreciation method for tangible fixed assets acquired on or after April 1, 2007 in accordance with the revision of Japanese Corporate Tax Law (Partial Revision of Income Tax Law, Law No. 6 of March 30, 2007; Partial Revision of Income Tax Law Enforcement Ordinance, Cabinet Order No. 83 of March 30, 2007). The effect of this change on operating income, income before income taxes and net income for the year ended March 31, 2008 was immaterial. Pursuant to an amendment to the Japanese Corporate Tax Law, effective from the year ended March 31, 2008, the Company and its domestic consolidated subsidiaries depreciate the difference between the original residual value of 5% of acquisition cost of assets acquired before April 1, 2007 and the new residual value of 1 yen (memorandum value) by the straight-line method over 5 years commencing from the fiscal year following the year in which the asset becomes fully depreciated to the original residual value. Depreciated amounts are included in depreciation expenses. As a result of this change, operating income and income before income taxes each declined ¥687 million, and net income declined ¥405 million for the year ended March 31, 2008. (4) Intangible Assets (Excluding Lease Assets) Intangible assets are mainly amortized using the straight-line method over the following estimated useful lives: Trademark rights: 10 years, mainly Software: 5 years, mainly (5) Lease Assets Effective from the current fiscal year, finance lease assets that are not deemed to transfer ownership of the leased property to the lessee are depreciated using the straight-line method over the period of the lease, with zero residual value. Previously, the Company and its domestic consolidated subsidiaries treated finance lease assets that do not transfer ownership as operating leases. Effective from the current fiscal year, however, the Company and its domestic consolidated subsidiaries have applied “Accounting Standard for Lease Transactions”(ASBJ, Statement No. 13, March 30, 2007; revised from standard originally issued by the Corporate Accounting Council on June 17, 1993) and “Guidance on Accounting Standard for Lease Transactions”(ASBJ, Guidance No. 16, March 30, 2007; revised from the standard originally issued by the Japanese Institute of Certified Public Accountants on January 18, 1994). Accordingly, from the current fiscal year, the Company and its domestic consolidated subsidiaries have treated such leases as capital leases. As a result of this change, operating income increased ¥285 million ($2,900 thousand), income before income taxes increased ¥180 million ($1,832 thousand), and net income decreased ¥106 million ($1,079 thousand) in the current fiscal year. The effects of this change in specific segments are described in Segment Information section (Note 18). (6) Long-Term Prepaid Expenses Long-term prepaid expenses are primarily amortized using the straight-line method. (7) Goodwill Amortization of goodwill is determined on a case by case basis and is generally amortized over a period not exceeding 20 years. (8) Securities The Company and its domestic consolidated subsidiaries categorize their existing securities as available-for-sale securities. Those securities with market prices are carried at fair values prevailing at the fiscal year end, with net unrealized gains and losses, net of taxes, reported separately in net assets. The cost of securities sold is mainly calculated using the moving average method. If fair value is not available, securities are carried at cost, which is determined mainly by the moving average method. Investments in limited partnerships are recorded as investments in securities at the amount of interest in such partnerships calculated based on ownership percentage. Investment gain or loss is included in net income or loss in proportion to the ownership interests in the net asset value of the partnership. Securities with remaining maturities of one year or less and securities that are recognized as cash equivalents are classified as short-term investments in securities and others are included in investments in securities as non-current assets. (9) Net Income and Cash Dividend per Share Net income per share of common stock is based on the weighted average number of shares of common stock outstanding during each year. The computation of fully diluted net income per share of common stock reflects the maximum possible dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock. Cash dividend per share shown for each year in the consolidated statements of income represent dividend declared as applicable to the respective year, rather than that paid in each year. 60 SHISEIDO ANNUAL REPORT 2009 Notes to the Consolidated Financial Statements (10) Accounting for Consumption Tax In Japan, consumption tax is imposed at a flat rate on all domestic consumption of goods, assets and services (with certain exemptions). The consumption tax withheld upon sales is recorded as a liability. Consumption tax, which is paid by the Company and its domestic consolidated subsidiaries on purchases of goods, assets and services, is offset against the balance withheld, and the net amount is subsequently paid to the national government. Transactions subject to consumption taxes are recorded at amounts exclusive of consumption taxes. (11) Allowance for Doubtful Accounts The Company and its domestic consolidated subsidiaries provide the allowance for doubtful accounts based on the historic percentage of actual bad debt losses against the balance of total receivables and the amount of uncollectible receivables estimated on an individual basis. Overseas consolidated subsidiaries record the allowance based primarily on the amount of uncollectible receivables estimated on an individual basis. (12) Reserve for Sales Returns The Companies provide reserve for sales returns for future losses considering the past return ratios and market distribution status. Prior to the year ended March 31, 2007, the Companies provided a reserve for sales returns based on historical return ratios. As a result of accumulation of past data and improvements in analytical precision, effective for the year ended March 31, 2007, the Company and its domestic consolidated subsidiaries adopted a new methodology that considers the market distribution status and product resale status to more accurately estimate sales returns. Accordingly, as a result of this change, operating income and income before income taxes decreased ¥3,636 million and net income decreased ¥2,145 million for the year ended March 31, 2007. (13) Accrued Bonuses for Employees The Companies provide accrued bonuses for employees based on the estimated amounts to be paid in respect of the fiscal year. This reserve includes bonuses for corporate officers who are non-Board members, for whom the calculations are the same as those for the Accrued Bonuses for Directors. Previously, the Company included accrued bonuses for employees in other current liabilities. Due to the introduction of a performance-based bonus system, the accrued amount represents an estimate, and, therefore, the Company recategorized this item as a separate line item; “Accrued Bonuses for Employees” from the year ended March 31, 2007. (14) Accrued Bonuses for Directors The Companies provide accrued bonuses for board directors (except for external directors) based on the estimated amounts to be paid in respect of the fiscal year. Effective from the year ended March 31, 2007, the Company and its domestic consolidated subsidiaries applied “Accounting Standard for Directors’ Bonuses” (ASBJ, Statement No. 4, issued November 29, 2005). As a result, for the year ended March 31, 2007, selling, general and administrative expenses increased ¥122 million and operating income, income before income taxes, and net income decreased by the same amount. (15) Provision for Liabilities and Charges To provide for losses due to legal risks, product guarantee risks, currency risks, tax risks, and other factors, certain overseas consolidated subsidiaries make provision, the amount of which is based on estimated losses to be incurred considering the likelihood of such losses in the future. (16) Accrued Retirement Benefits The Companies have obligations to pay retirement benefits to their employees and, therefore, the Company, its domestic consolidated subsidiaries and certain overseas consolidated subsidiaries provide accrued retirement benefits based on the estimated amount of projected benefit obligation and the fair value of plan assets. Unrecognized prior service cost is primarily amortized by the straight-line method over a 10-year period, which is shorter than the average remaining years of service of the eligible employees. Unrecognized net actuarial gain or loss is primarily amortized from the following year on a straight-line basis over a 10-year period, which is shorter than the average remaining years of service of the eligible employees. Until the previous fiscal year, accrued retirement benefits for corporate officers were included in Accrued Retirement Benefits. However, in accordance with the public announcement of the “Auditing Treatment Relating to Reserve Defined under the Special Tax Measurement Law, Reserve Defined under the Special Law, and Reserve for Director and Corporate Auditor Retirement Benefits” (Japanese Institute of Certified Public Accountants, Auditing and Assurance Practice Committee, Report No. 42, revised April 13, 2007) and because they are definitely payable within one year, accrued benefits for corporate officers are included in “Other payables” effective for the year ended March 31, 2008. (17) Accrued Retirement Benefits for Directors and Corporate Auditors In the year ended March 31, 2004, the Board of Directors of the Company resolved to abolish the unfunded retirement benefit plans for directors, corporate auditors and corporate officers, effective on the date of the Ordinary General Meeting of Shareholders for the year ended March 31, 2004. The Company provided the amount equivalent to the unfunded lump-sum payments for their service up to March 31, 2004 based on the accrued retirement benefits for directors and corporate auditors determined by the Board of Directors. Previously, the Company included the amount in “Accrued Retirement Benefits for Directors and Corporate Auditors”. However, in accordance with the public announcement of the “Auditing Treatment Relating to Reserve Defined under the Special Tax Measurement Law, Reserve Defined under the Special Law, and Reserve for Director and Corporate Auditor Retirement Benefits” (Japanese Institute of Certified Public Accountants, Auditing and SHISEIDO ANNUAL REPORT 2009 61 Assurance Practice Committee, Report No. 42, revised April 13, 2007), these benefits are included in “Other long-term liabilities” effective for the year ended March 31, 2008. (18) Allowance for Losses on Guarantees The Company provides an allowance for estimated probable losses on guarantees based on the financial status of the guaranteed parties. (19) Foreign Currency Translation Receivables and payables denominated in foreign currencies are translated into Japanese yen at the exchange rate prevailing on the respective balance sheet dates, and resulting exchange gains or losses are included in net income or loss for the fiscal year. Investments in unconsolidated subsidiaries and affiliates denominated in foreign currencies are translated at the historical exchange rates prevailing at the time of the transaction. (20) Derivatives and Hedging Activities The Companies use foreign currency exchange agreements and interest rate swap agreements to reduce market risks and maintain stable profits. The Companies limit their use of foreign currency related derivative transactions to the amounts of foreign currency denominated receivables and payables, and do not use derivatives for speculative trading. The Companies’ basic policies regarding derivatives are determined by the Board of Directors, and contracts are entered into and controlled by the Financial Department. Transactions involving derivative contracts are exposed to market risks. The counter parties are limited to highly rated banking institutions and the Companies consider there are no material credit risks associated with them. Derivatives are carried at fair value with gains or losses recognized in the consolidated statements of income. For derivatives used for hedging purposes, gains or losses on derivatives are deferred until recognition of the hedged transactions. Also, if interest rate swap contracts are used as a hedge and meet certain hedging criteria, the interest rate swaps are not remeasured at market price, and the amount to be received under the interest rate swap contract is added to or deducted from the interest on the liabilities for which the swap contract was executed (special accounting). The Companies’ policy is to evaluate the effectiveness of derivatives used for hedging purpose based on either the difference between the accumulated amount of cash flows from the hedging instrument and from the corresponding hedged item or variance between the market value of the hedging instrument and the hedged item. However, measurement of hedge effectiveness is not considered necessary for interest-rate swaps that meet the requirements for special accounting. (21) Foreign Currency Financial Statements Foreign currency financial statement amounts of overseas consolidated subsidiaries and affiliates are translated into Japanese yen at the exchange rates prevailing at the respective balance sheet dates of those subsidiaries for assets and liabilities, and at the historical exchange rates for shareholders’ equity. All income and expense amounts are translated at the average rates of exchange during the fiscal year of those subsidiaries and affiliates. The resulting translation adjustments are included in net assets as foreign currency translation adjustments and minority interests. (22) Definition of “Cash and Cash Equivalents” in Consolidated Statements of Cash Flows Cash and cash equivalents as shown in the consolidated statements of cash flows are composed of cash in hand, readily available time deposits, and short-term investments with maturities of 3 months or less at the time of purchase that are exposed to insignificant risk of change in value. (23) Accounting Standard for Presentation of Net Assets in the Consolidated Balance Sheet Effective from the year ended March 31, 2007, the Company applied “Accounting Standard for Presentation of Net Assets in the Balance Sheet” (ASBJ, Statement No. 5, issued December 9, 2005) and “Implementation Guidance on Accounting Standard for Presentation of Net Assets in the Balance Sheet” (ASBJ, Guidance No. 8, issued December 9, 2005). (24) Accounting Standards for Business Combinations and Divestitures Effective from the year ended March 31, 2007, the Company and its domestic consolidated subsidiaries applied “Accounting Standard for Business Combinations” (Business Accounting Council, issued October 31, 2003) and “Accounting Standard for Business Divestitures” (ASBJ, Statement No. 7, issued December 27, 2005) and “Guidance on Accounting Standard for Business Combinations and Accounting Standard for Business Divestitures” (ASBJ, Guidance No. 10, final revision on December 22, 2006). (25) Accounting Standards for Stock Options Effective from the year ended March 31, 2007, the Company applied “Accounting Standard for Share-Based Payment” (ASBJ, Statement No. 8, issued December 27, 2005) and “Implementation Guidance on Accounting Standard for Share-Based Payment” (ASBJ, Guidance No. 11, final revision on May 31, 2006). As a result, for the year ended March 31, 2007, selling, general and administrative expenses increased ¥52 million, operating income and income before income taxes decreased by the same amount and net income decreased by ¥45 million. (26) Revision to Accounting Standard for Treasury Stock and Reduction of Legal Reserves Effective from the year ended March 31, 2007, the Company applied the revised “Accounting Standard for Treasury Stock and Reduction of Legal Reserves” (ASBJ, Statement No. 1, final revision on August 11, 2006) and “Implementation Guidance on Accounting Standard for Treasury Stock and Reduction of Legal Reserves” (ASBJ, Guidance No. 2, final revision on August 11, 2006). The change had no impact on the consolidated statements of income for the year ended March 31, 2007. 62 SHISEIDO ANNUAL REPORT 2009 Notes to the Consolidated Financial Statements (27) Application of Control Criteria and Influence Criteria to Investment Associations Effective from the year ended March 31, 2007, the Company applied “Practical Solution on Application of Control Criteria and Influence Criteria to Investment Associations” (ASBJ, Practical Issues Task Force No. 20, issued September 8, 2006). As a result, for the year ended March 31, 2007, operating income increased ¥1,376 million, while income before income taxes decreased ¥507 million, and net income decreased ¥337 million. (28) Changes in Classification In the previous fiscal year, negotiable certificates of deposit issued by domestic corporations were included in “Cash and Time Deposits.” Effective from the year ended March 31, 2008, however, this item is included in “Short-Term Investments in Securities”. This change is in accordance with “Practical Guidelines for Accounting for Financial Instruments” (Accounting Committee Report No. 14, issued by the Japanese Institute of Certified Public Accountants, July 4, 2007), and amended “Q&A on Accounting for Financial Instruments” issued by the Japanese Institute of Certified Public Accountants (JICPA, November 6, 2007). (29) Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements Effective from the current fiscal year, the Company has applied “Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements” (ASBJ, Practical Issues Task Force No. 18, issued May 17, 2006), and necessary modifications have been made for consolidation. As a result of this change, in the current fiscal year, operating income decreased ¥1,095 million ($11,144 thousand), income before income taxes decreased ¥950 million ($9,668 thousand), and net income increased ¥456 million ($4,641 thousand). The effects of this change in specific segments are described in Segment Information section (Note 18). 3. CASH FLOW INFORMATION The reconciliation of cash and time deposits shown in the consolidated balance sheets and cash and cash equivalents shown in the consolidated statements of cash flows as of March 31, 2007, 2008 and 2009 is as follows: Thousands of U.S. dollars (Note 1) Millions of yen Cash and time deposits································· Short-term investments in securities·············· Total ······················································· Time deposits with maturities exceeding 3 months ··· Equity securities and debt securities with maturities exceeding 3 months ························ Cash and cash equivalents ···························· 2007 2008 ¥ 65,453 85,544 ¥150,997 (4,121) ¥ 67,413 65,075 ¥132,488 (9,679) ¥ 57,411 47,344 ¥104,755 (11,536) 2009 $ 584,276 481,824 $1,066,100 (117,403) 2009 (1,616) ¥145,260 (2,415) ¥120,394 (1,361) ¥ 91,858 (13,851) $ 934,846 The assets and liabilities on the date of sale of Mieux Products Co., Ltd., which was sold during the year ended March 31, 2007, and the relationship between the proceeds from sale of shares and net cash proceeds from sale of shares is as follows: Millions of yen Current assets ····························································································· Non–current assets ······················································································ Current liabilities ·························································································· Non–current liabilities ·························································································· Minority interests in consolidated subsidiaries ······················································ Loss on sale of shares of Mieux Products Co., Ltd. ··········································· Proceeds from sale of shares of Mieux Products Co., Ltd. ·································· Cash and cash equivalents of Mieux Products Co., Ltd. ······································ Net cash proceeds from sale of shares of Mieux Products Co., Ltd. ····················· ¥1,707 904 (790) (236) (555) (20) ¥1,010 (878) ¥ 132 The assets and liabilities on the date of sale of Shiseido Logistics Co., Ltd., which was sold during the year ended March 31, 2008, and the relationship between the proceeds from sale of shares and net cash proceeds from sale of shares is as follows: Millions of yen Current assets ····························································································· Non-current assets ······················································································· Current liabilities ·························································································· Non-current liabilities ·························································································· Remaining investment balance after sale of shares ··············································· Decrease in retained earnings resulting from exclusion of consolidated subsidiaries ····· Profit on sale of shares of Shiseido Logistics Co., Ltd. ······································· Proceeds from sale of shares of Shiseido Logistics Co., Ltd. ······························· Cash and cash equivalents of Shiseido Logistics Co., Ltd. ··································· Net cash proceeds from sale of shares of Shiseido Logistics Co., Ltd. ·················· ¥ 4,411 522 (3,754) (653) 0 (53) 2,379 ¥ 2,852 (1,923) ¥ 929 The assets and liabilities on the date of sale of Shiseido Lease Co., Ltd., which was sold during the year ended March 31, 2008, and the relationship between the proceeds from sale of shares and net cash proceeds from sale of shares is as follows: SHISEIDO ANNUAL REPORT 2009 63 Millions of yen Current assets ····························································································· Non-current assets ······················································································· Current liabilities ·························································································· Non-current liabilities ··························································································· Unrealized profit and other ·················································································· Remaining investment balance after sale of shares ··············································· Decrease in retained earnings resulting from exclusion of consolidated subsidiaries ······ Profit on sale of shares of Shiseido Lease Co., Ltd. ··········································· Proceeds from sale of shares of Shiseido Lease Co., Ltd. ··································· Cash and cash equivalents of Shiseido Lease Co., Ltd.······································· Net cash proceeds from sale of shares of Shiseido Lease Co., Ltd. ······················ ¥ 3,449 6,367 (4,660) (4,236) 38 (18) (61) 723 ¥ 1,602 (120) ¥ 1,482 The assets and liabilities on the date of sale of Shiseido Real Estate Development Co., Ltd., which was sold during the year ended March 31, 2009, and the relationship between the proceeds from sale of shares and net cash proceeds from sale of shares is as follows: Millions of yen Current assets ····························································································· Non-current assets ······················································································· Current liabilities ·························································································· Non-current liabilities ··························································································· Remaining investment balance after sale of shares ··············································· Increase in retained earnings resulting from exclusion of consolidated subsidiaries ···· Profit on sale of shares of Shiseido Real Estate Development Co., Ltd. ················· Proceeds from sale of shares of Shiseido Real Estate Development Co., Ltd. ········ Cash and cash equivalents of Shiseido Real Estate Development Co., Ltd. ············ Net cash proceeds from sale of shares of Shiseido Real Estate Development Co., Ltd. ····· ¥ 3,638 559 (3,396) (350) (49) 4 71 ¥ 477 (134) ¥ 343 Thousands of U.S. dollars (Note 1) $ 37,024 5,689 (34,561) (3,562) (499) 41 723 $ 4,855 (1,364) $ 3,491 The important non-cash transactions are as follows: The amounts of assets and obligations related to finance lease transactions that were newly recorded in the current fiscal year are ¥9,281 million ($94,453 thousand) and ¥9,497 million ($96,652 thousand) for lease assets and lease obligations, respectively. 4. SECURITIES The acquisition cost, carrying amount, and gross unrealized gains and losses for securities with fair value by security type at March 31, 2008 and 2009 are as follows: Available-for-sale securities: Millions of yen 2008 Cost Equity securities ·········································· Corporate bonds ·········································· Other ·························································· ···································································· ¥ 9,505 4,500 1,615 ¥15,620 Carrying amount Gross unrealized gains ¥18,976 4,024 1,627 ¥24,627 ¥9,603 6 13 ¥9,622 Gross unrealized losses ¥133 390 92 ¥615 Millions of yen 2009 Cost Equity securities ·········································· Corporate bonds ·········································· Other ·························································· ···································································· ¥12,235 4,990 1,550 ¥18,775 Carrying amount Gross unrealized gains ¥13,516 4,456 1,392 ¥19,364 ¥3,531 3 — ¥3,534 Gross unrealized losses ¥2,250 537 158 ¥2,945 Thousands of U.S. dollars (Note 1) 2009 Cost Equity securities ·········································· Corporate bonds·············································· Other ······························································· ···································································· $124,517 50,784 15,774 $191,075 Carrying amount Gross unrealized gains $137,554 45,349 14,166 $197,069 $35,935 31 — $35,966 Gross unrealized losses $22,898 5,466 1,608 $29,972 The carrying amount of securities without fair value by security type as of March 31, 2008 and 2009 is summarized as follows: Available-for-sale securities: Carrying amount Thousands of U.S. dollars (Note 1) Millions of yen 2008 Unlisted equity securities························································· Unlisted bonds ········································································ Other ····················································································· ...................................................................................................... 64 SHISEIDO ANNUAL REPORT 2009 ¥11,142 2,456 65,227 ¥78,825 2009 ¥11,124 970 48,514 ¥60,608 2009 $113,210 9,872 493,731 $616,813 Notes to the Consolidated Financial Statements Proceeds from sales, and gross realized gains and losses from the sale of available-for-sale securities in the years ended March 31, 2007, 2008 and 2009 are as follows: Carrying amount Thousands of U.S. dollars (Note 1) Millions of yen 2007 Proceeds from sales ······························· Gross realized gains ································ Gross realized losses ······························· ¥10,212 310 167 2008 2009 ¥13,682 2,109 1,687 ¥1,980 36 12 2009 $20,151 366 122 The carrying value of debt securities by contractual maturity for securities classified as available-for-sale as of March 31, 2009 is as follows: Millions of yen Due in 1 year or less····················································································· Due after 1 year through 5 years ···································································· Due after 5 years through 10 years ································································· Due after 10 years ······························································································ ¥ 6,587 1,602 118 5,000 ¥13,307 Thousands of U.S. dollars (Note 1) $ 67,036 16,304 1,201 50,885 $135,426 5. INVENTORIES Inventories held by the Companies as of March 31, 2008 and 2009 are as follows: Thousands of U.S. dollars (Note 1) Millions of yen 2008 Merchandise and products······················································· Work in process ······································································ Raw materials and supplies ················································· 2009 ¥41,365 4,304 22,817 ¥68,486 ¥40,172 4,187 23,971 ¥68,330 2009 $408,834 42,611 243,955 $695,400 6. SHORT-TERM AND LONG-TERM DEBT Short-term and long-term debt as of March 31, 2008 and 2009 are as follows: Thousands of U.S. dollars (Note 1) Millions of yen 2008 Bank borrowings (weighted average interest rate 6.12%) ··········· Commercial paper (Borrowings due within one year, weighted average interest rate 1.00%) ········································ Short-term debt ············································································ Long-term borrowings from banks and other financial institutions (Borrowings due within one year, weighted average interest rate 1.37%)····· (Borrowings due after one year, weighted average interest rate 1.75%)······· 1.12% unsecured yen bonds due in March 2010························· Medium-term notes due 2008*···················································· Lease obligations (Borrowings due within one year, weighted average interest rate 3.37%)····· (Borrowings due after one year, weighted average interest rate 3.71%)······· ........................................................................................ Less: portion due within one year ················································ Long-term debt············································································· 2009 2009 ¥ 4,704 ¥ 3,709 $ 37,747 — ¥ 4,704 819 ¥ 4,528 8,335 $ 46,082 27,100 4,566 20,000 6,849 800 31,111 20,000 — 8,142 316,619 203,542 — — — ¥ 58,515 (33,949) ¥ 24,566 2,273 3,341 ¥ 57,525 (23,073) ¥ 34,452 23,132 34,002 $ 585,437 (234,816) $ 350,621 * This note has been issued by Shiseido International Corporation (currently Shiseido Americas Corporation). The interest rates during the year ended March 31, 2008 ranged from 4.01% to 4.05%. The aggregate annual maturities of long-term debt as of March 31, 2009 are as follows: For the Years Ending March 31 Millions of yen 2010 ········································································································ 2011 ········································································································ 2012 ········································································································ 2013 ········································································································ 2014 ········································································································ 2015 and thereafter ······························································································ ¥23,073 2,367 3,584 3,092 25,198 211 ¥57,525 Thousands of U.S. dollars (Note 1) $234,816 24,089 36,475 31,468 256,442 2,147 $585,437 Assets pledged as collateral as of March 31, 2009 are as follows: Millions of yen 2009 Buildings and structures···························································································· Other investments ······························································································ Investments in securities····················································································· Cash and time deposits ······················································································· ······················································································································ ¥21,563 15,200 1,512 1,021 ¥39,296 Thousands of U.S. dollars (Note 1) 2009 $219,448 154,692 15,388 10,391 $399,919 SHISEIDO ANNUAL REPORT 2009 65 The above assets are pledged as collateral for derivative transactions (interest rate swaps) and the following collateralized liabilities as of March 31, 2009: Millions of yen 2009 Current portion of long-term debt ············································································· Long-term debt ········································································································· ¥ 800 25,650 ¥26,450 Thousands of U.S. dollars (Note 1) 2009 $ 8,142 261,042 $269,184 7. ACCRUED RETIREMENT BENEFITS The Company and its domestic consolidated subsidiaries have contributory funded pension plans and unfunded termination allowance plans, which are defined benefit plans. In some cases, additional voluntary retirement benefits are paid when an employee retires, which are accounted for as retirement benefit expenses when incurred. Certain overseas consolidated subsidiaries also have defined benefit pension plans, unfunded termination allowance plans and defined contribution plans. The reconciliation of projected benefit obligations, plan assets, funded status of the pension benefit plans, prepaid pension expense and accrued retirement benefits recognized in the accompanying balance sheets as of March 31, 2008 and 2009 is as follows: Thousands of U.S. dollars (Note 1) Millions of yen Projected benefit obligations······················································· Fair value of plan assets······························································ Funded status of the pension benefit plans································ Unamortized net obligation at transition* ··································· Unrecognized net actuarial loss ·················································· Unrecognized prior service cost ·················································· Additional minimum liability* ······················································ Net retirement benefit obligation ················································ Prepaid pension expense ···························································· Accrued retirement benefits ······················································· 2008 2009 2009 ¥(195,564) 173,532 (22,032) 932 27,973 (7,136) (1,351) ¥ (1,614) 35,159 ¥ (36,773) ¥(200,767) 144,086 (56,681) — 56,885 (5,115) — ¥ (4,911) 34,360 ¥ (39,271) $(2,043,222) 1,466,375 (576,847) — 578,923 (52,055) — $ (49,979) 349,685 $ (399,664) The net periodic pension benefit costs for the years ended March 31, 2007, 2008 and 2009 are as follows: Thousands of U.S. dollars (Note 1) Millions of yen Service cost ···················································· Interest cost···················································· Expected return on plan assets······················· Amortization of net obligation at transition*···· Amortization of net actuarial loss ···················· Amortization of prior service cost ··················· Net periodic pension benefit cost ··················· 2007 2008 ¥ 7,876 4,546 (7,328) 113 3,069 (2,125) ¥ 6,151 ¥ 7,862 4,646 (7,614) 113 2,843 (2,021) ¥ 5,829 2009 ¥ 8,712 4,965 (7,011) — 5,500 (2,125) ¥10,041 2009 $ 88,663 50,529 (71,352) — 55,974 (21,626) $102,188 * The amounts for the years ended March 31, 2007 and 2008 pertain to a Taiwanese subsidiary, according to the Taiwanese retirement allowance accounting system. The net obligation at transition is amortized by the straight-line method over a 17-year period. The discount rate used to determine the actuarial present value of projected benefit obligations as of March 31, 2008 and 2009 is mainly 2.5%. The expected rate of return on plan assets of those plans as of March 31, 2008 and 2009 is mainly 4.0%. Allocation of pension benefits to each year of service of the employees is based on the “benefits/years-ofservice” approach, whereby the same amount of benefits is allocated to each year. Certain foreign consolidated subsidiaries have adopted the corridor approach for the amortization of actuarial gains and losses. In addition, certain other overseas consolidated subsidiaries recorded accrued retirement benefits according to the accounting standards of their respective countries up to the year ended March 31, 2008. The total amount of these accrued retirement benefit at March 31, 2008 was ¥1,529 million. 8. INCOME TAXES Income tax applicable to the Company and its domestic consolidated subsidiaries consist of corporation, inhabitants’ and enterprise taxes. The statutory income tax rate is approximately 41.0% for the years ended March 31, 2007, 2008 and 2009. Since the difference between the statutory tax rate and the effective tax rate for the fiscal years ended March 31, 2007, 2008 and 2009 is less than 5%, a reconciliation of these two rates is not presented. 66 SHISEIDO ANNUAL REPORT 2009 Notes to the Consolidated Financial Statements Deferred tax assets and liabilities (both current and non-current) as of March 31, 2008 and 2009 are as follows: Thousands of U.S. dollars (Note 1) Millions of yen 2008 Deferred tax assets: Inventory ·················································································· Depreciation ············································································· Tax losses carried forward························································ Accrued expenses···································································· Accrued bonuses for employees·············································· Unrealized intercompany profit in inventory and property, plant and equipment ··············································· Write-down of investments in securities and other investments ···· Reserve for sales returns ························································· Accrued retirement benefits····················································· Accrued enterprise tax ····························································· Other ························································································ Total gross deferred tax assets ················································ Less: valuation allowance························································· Total deferred tax assets ·························································· Deferred tax liabilities: Goodwill and other intangible assets········································ Special tax-purpose reserve ····················································· Undistributed earnings of foreign subsidiaries·························· Unrealized gains (losses) on available-for-sale securities ·········· Other ························································································ Total deferred tax liabilities ······················································· Net deferred tax assets ···························································· 2009 2009 ¥ 6,572 8,244 5,651 5,401 4,868 ¥ 9,190 8,283 5,564 4,554 3,858 $ 93,527 84,297 56,625 46,347 39,263 9,020 7,909 757 409 777 4,190 53,798 (8,839) ¥44,959 3,530 2,374 2,025 1,743 222 4,099 45,442 (6,078) ¥39,364 35,925 24,160 20,609 17,739 2,259 41,716 462,467 (61,856) $400,611 ¥ 1,869 1,063 1,256 3,674 499 ¥ 8,361 ¥36,598 ¥ 2,099 1,028 506 234 1,007 ¥ 4,874 ¥34,490 $ 21,362 10,462 5,150 2,381 10,248 $ 49,603 $351,008 9. CONTINGENT LIABILITIES 1. As of March 31, 2008 and 2009, the Company was contingently liable as a guarantor for SDL Co., Ltd.’s own guarantees for the lease liabilities of third-party customers, amounting to ¥153 million and ¥56 million ($570 thousand), respectively. 2. On March 15, 2006, the French Competition Council reprimanded consolidated subsidiaries Shiseido France S.A. (currently Shiseido Europe S.A.S.) and Beauté Prestige International S.A. for impeding fair competition and ordered payment of a 1,150 thousand Euro fine. Shiseido France S.A. and Beauté Prestige International S.A. appealed this decision and brought the case before the French Supreme Court, which remanded the case for retrial before a court of appeals. Shiseido France and Beauté Prestige International are now litigating the case in the court of appeals in Paris. 3. On July 4, 2008, the German Cartel Office reprimanded consolidated subsidiary Shiseido Deutschland GmbH for impeding fair competition and ordered payment of a 728 thousand Euro fine. However, Shiseido Deutschland GmbH does not concur with the ruling and has filed an objection with the German Cartel Office. 10. NET ASSETS Under Japanese laws and regulations, the entire amount paid for new shares is required to be designated as common stock. However, a company may, by a resolution of the Board of Directors, designate an amount not exceeding one half of the price of the new shares as additional paid-in capital, which is included in capital surplus. Under the Japanese Corporate Law (“the Law”), in cases where dividend distribution of surplus is made, the lesser of an amount equal to 10% of the dividend or the excess, if any, of 25% of common stock over the total of additional paidin capital and legal earnings reserve, must be set aside as additional paid-in capital or legal earnings reserve. Legal earnings reserve is included in retained earnings in the accompanying consolidated balance sheets. Under the Law, both legal earnings reserve and additional paid-in capital used to eliminate or reduce a deficit generally require a resolution of the shareholders’ meeting. Additional paid-in capital and legal earnings reserve may not be distributed as dividends. Under the Law, all additional paid-in capital and legal earnings reserve may be transferred to other capital surplus and retained earnings under certain conditions. The maximum amount that the Company can distribute as dividends is calculated based on the non-consolidated financial statements of the Company in accordance with the Law. Under the Law, companies can pay a dividend at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders’ meeting. For companies that meet certain criteria such as: (1) having a Board of Directors, (2) having accounting auditors, (3) having a Board of Corporate Auditors, and (4) the term of service of the directors is prescribed as one year rather than two years as the normal term by its articles of incorporation, the Board of Directors may declare a dividend if the company has prescribed so in its articles of incorporation. A semiannual interim dividend may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of the company so stipulate. Cash dividends charged to retained earnings during the fiscal year were the year-end cash dividend for the preceding fiscal year and the interim cash dividend for the current fiscal year. Appropriations are not accrued in the consolidated financial statements for the corresponding period, but are SHISEIDO ANNUAL REPORT 2009 67 recorded in the subsequent accounting period after shareholders’ meeting approval has been obtained. Retained earnings at March 31, 2009 include amounts representing year-end cash dividend of ¥10,038 million ($102,158 thousand), ¥25.0 ($0.25) per share, which was approved at the shareholders’ meeting held on June 24, 2009. 11. STOCK OPTION PLAN Summarized information on the stock options granted as of March 31, 2009 is as follows: ➀ Stock option plan approved by the shareholders on June 27, 2002 Stock options granted on July 16, 2002 Number of shares for options granted Number of shares for options outstanding Exercise price Exercisable period 578,000 shares 239,000 shares ¥1,669 July 1, 2004 - June 26, 2012 Total 578,000 shares 239,000 shares ➁ Stock option plan approved by the shareholders on June 27, 2003 Stock options granted on July 31, 2003 Number of shares for options granted Number of shares for options outstanding Exercise price Exercisable period 878,000 shares 141,000 shares ¥1,287 July 1, 2005 - June 26, 2013 Total 878,000 shares 141,000 shares ➂ Stock option plan approved by the shareholders on June 29, 2004 Stock options granted on July 26, 2004 Number of shares for options granted Number of shares for options outstanding Exercise price Exercisable period Total 1,004,000 shares 1,004,000 shares 667,000 shares 667,000 shares ¥1,427 July 1, 2006 - June 28, 2014 ➃ Stock option plan approved by the shareholders on June 29, 2005 Stock options granted on July 28, 2005 Number of shares for options granted Number of shares for options outstanding Exercise price Exercisable period Stock options granted on October 27, 2005 Number of shares for options granted 11,000 shares Number of shares for — options outstanding Exercise price ¥1,865 Exercisable period November 1, 2005 - October 31, 2008 408,000 shares Stock options granted on July 28, 2005 261,000 shares 108,000 shares ¥1 July 1, 2008 - June 30, 2011 258,000 shares ¥1,481 July 1, 2007 - June 28, 2015 Stock options granted on November 7, 2005 Stock options granted on March 8, 2006 1,851,000 shares 621,000 shares ¥1,896 July 1, 2007 - June 30, 2010 63,000 shares — ¥2,012 April 1, 2006 - March 31, 2009 Total 2,594,000 shares 987,000 shares ➄ Stock option plan approved by the shareholders on June 29, 2006 and resolved by the Board of Directors on July 31, 2006. Stock options granted on August 23, 2006 Number of shares for options granted Number of shares for options outstanding Exercise price Exercisable period Stock options granted on August 23, 2006 Number of shares for options granted 12,000 shares Number of shares for options outstanding 9,000 shares Exercise price ¥1 Exercisable period July 1, 2008 - June 30, 2011 9,000 shares 2,000 shares ¥1 July 1, 2008 - June 30, 2011 Stock options granted on August 23, 2006 67,000 shares 67,000 shares ¥2,300 August 1, 2008 - July 30, 2016 Stock options granted on August 23, 2006 74,000 shares 74,000 shares ¥2,300 August 1, 2008 - July 30, 2016 Total 162,000 shares 152,000 shares ➅ Stock option plan approved by the shareholders on June 26, 2007 and resolved by the Board of Directors on July 31, 2007. Stock options granted on August 23, 2007 Number of shares for options granted Number of shares for options outstanding Exercise price Exercisable period 68 SHISEIDO ANNUAL REPORT 2009 2,000 shares — ¥1 July 1, 2008 - June 30, 2011 Notes to the Consolidated Financial Statements Stock options granted on August 23, 2007 Number of shares for options granted 15,000 shares Number of shares for 10,000 shares options outstanding Exercise price ¥1 Exercisable period July 1, 2008 - June 30, 2011 Stock options granted on August 23, 2007 81,000 shares 81,000 shares ¥2,615 August 1, 2009 - July 30, 2017 Stock options granted on August 23, 2007 78,000 shares 78,000 shares ¥2,615 August 1, 2009 - July 30, 2017 Total 176,000 shares 169,000 shares ➆ Stock option plan approved by the shareholders on June 25, 2008 and resolved by the Board of Directors on July 31, 2008. Stock options granted on August 21, 2008 Number of shares for options granted Number of shares for options outstanding Exercise price Exercisable period 46,000 shares 46,000 shares ¥1 August 1, 2011 - July 30, 2018 Stock options granted on August 21, 2008 40,000 shares 40,000 shares ¥1 August 1, 2011 - July 30, 2018 Total 86,000 shares 86,000 shares 12. RESEARCH AND DEVELOPMENT Research and development expenses are expensed as incurred. Research and development expenses, which are included in selling, general and administrative expenses, totaled ¥16,133 million, ¥14,566 million and ¥15,243 million ($155,129 thousand) for the years ended March 31, 2007, 2008 and 2009, respectively. There are no research and development expenses included in total manufacturing expenses for the years ended March 31, 2007, 2008 and 2009. 13. TRANSACTIONS WITH RELATED PARTIES The Company contributed ¥1 million to the Shiseido Social Welfare Foundation (“the Foundation”) in the years ended March 31, 2007 and 2008. The Foundation performs social support specializing in child welfare. Shinzo Maeda, President and CEO (Representative Director) of the Company, is the Chairman of the Foundation. The Company approved the amount of contribution at a Board of Directors meeting. Shoichiro Iwata, an External Director of the Company, is the Representative Director of ASKUL Corporation. The Company purchases stationery and other products from ASKUL Corporation and the amount of transactions was ¥94 million for the year ended March 31, 2008 and the ending balance was ¥42 million in other payables as of March 31, 2008. Effective from the current fiscal year, the Company has applied “Accounting Standard for Disclosure of Related Party Transactions” (ASBJ, Statement No. 11, October 17, 2006) and “Guidance on Accounting Standard for Related Party Disclosures” (ASBJ, Guidance No. 13, October 17, 2006). As a result, transactions between the Company and the executives of important subsidiaries are disclosed in addition to those related party transactions disclosed previously. The Company paid advisory services fees of ¥14 million ($142 thousand) to Rémy Gomez, the President and CEO of Beauté Prestige International, a consolidated subsidiary, for the year ended March 31, 2009 and the ending balance was ¥7 million ($71 thousand) as prepaid expenses in other current assets as of March 31, 2009. The advisory services fee conforms to customary practices. 14. ACCOUNTING FOR LEASES The Companies have various lease agreements whereby the Companies act both as a lessee and a lessor. Finance leases of the Company and its domestic consolidated subsidiaries other than those deemed to transfer the ownership of the leased assets to the lessee, which previously were not recorded on the balance sheets, are recorded on the balance sheets from the year ended March 31, 2009. Information on finance lease contracts other than those deemed to transfer the ownership of the leased assets as a lessee and a lessor for the years ended March 31, 2007 and 2008 was as follows: SHISEIDO ANNUAL REPORT 2009 69 Millions of yen 2007 2008 ➀ As lessee: The scheduled maturities of future lease rental payments on such lease contracts are as follows: Due within one year ······························ Due after one year································· ¥ 2,788 4,161 ¥ 6,949 ¥ 3,335 4,050 ¥ 7,385 Balance of allowance for impairment loss on leased assets······························ Reversed lease impairment loss ·················· Lease rental expenses for the year ·············· Assumed depreciation································· Impairment loss ········································· ¥ 15 ¥ 103 ¥ 3,688 ¥ 3,681 ¥ 7 ¥ 14 ¥ 9 ¥ 3,229 ¥ 3,220 ¥ 8 Leased machinery and equipment: Assumed purchase cost ························ ¥15,155 ¥ 22,012 Assumed accumulated depreciation ········ Assumed impairment loss······················· Assumed net book value ······················· (8,206) (15) ¥ 6,934 (14,627) (14) ¥ 7,371 Assumed purchase cost and the scheduled maturities of future lease rental payment include the capitalized interest thereon, as the proportion of future lease rental payments to total property, plant and equipment is immaterial. Assumed depreciation is based on the straight-line method over the lease term of the leased assets, assuming no residual value. Millions of yen ➁ As lessor: The scheduled maturities of future lease rental payments on such lease contracts are as follows: Due within one year ······························ Due after one year································· 2007 2008 ¥ 1,324 2,046 ¥ 3,370 — — — Lease rental income for the year ················· Depreciation················································ Assumed interest income···························· ¥ 1,999 ¥ 1,740 ¥ 203 ¥1,596 ¥1,380 ¥ 165 Leased machinery and equipment: Purchase cost ········································ Accumulated depreciation ····················· Net book value········································ ¥ 8,784 (5,584) ¥ 3,200 — — — Assumed interest income is calculated based on the interest method. Lease obligations under operating leases at March 31, 2007, 2008 and 2009 are as follows: Thousands of U.S. dollars (Note 1) Millions of yen 2007 2008 2009 2009 ¥1,629 4,454 ¥6,083 ¥2,260 6,514 ¥8,774 ¥2,655 5,944 ¥8,599 $27,020 60,493 $87,513 ¥ 210 381 ¥ 591 — — — — — — — — — ➀ As lessee: The scheduled maturities of future lease rental payments on such lease contracts are as follows: Due within one year ······························ Due after one year································· ➁ As lessor: The scheduled maturities of future lease rental payments on such lease contracts are as follows: Due within one year ······························ Due after one year································· 70 SHISEIDO ANNUAL REPORT 2009 Notes to the Consolidated Financial Statements 15. DERIVATIVE FINANCIAL INSTRUMENTS The contract amount, estimated fair value and unrealized gain (loss) of the derivative contracts as of March 31, 2008 and 2009 are as follows: Millions of yen 2008 Contract amount Settled over one year Total Interest swap contracts: To receive variable/to pay fixed···················· ¥2,283 Estimated fair value ¥2,283 ¥(107) Unrealized gain (loss) ¥(107) Millions of yen 2009 Contract amount Settled over one year Estimated fair value ¥1,396 161 — — ¥1,472 158 1,820 — ¥1,820 — Total Foreign exchange contracts: Put US$··············· Foreign exchange contracts: Call US$ ············· Interest swap contracts: To receive variable/to pay fixed···················· (168) — Unrealized gain (loss) ¥ (76) (3) (168) ¥(247) Thousands of U.S. dollars (Note 1) 2009 Contract amount Foreign exchange contracts: Put US$··············· Foreign exchange contracts: Call US$ ·············· To receive variable/to pay fixed···················· Total Settled over one year Estimated fair value Unrealized gain (loss) $14,207 1,639 18,522 — — — $18,522 — $14,980 1,608 (1,710) — $ (773) (31) (1,710) $(2,514) Derivatives that meet the criteria for hedges are excluded from the above table. 16. IMPAIRMENT LOSS For impairment accounting purposes, the Companies pool their business-use assets separately from their idle assets. Business-use assets are generally pooled according to the minimum independent cash-flow-generating unit, based on business classification. Idle assets are pooled according to each separate property. Business-use assets due to be sold have been devalued from the book value to the recoverable value, with the differences reported as other expenses. Idle assets whose market value have declined have been devalued from the book value to the recoverable value, with the differences reported as other expenses. Recoverable values are calculated according to estimated net sale value, which are mainly based on real estate appraisal values. Impairment loss on overseas assets is mainly recognized due to decreasing profitability of long-lived assets of European and American subsidiaries. Impairment losses for the years ended March 31, 2007, 2008 and 2009 are as follows: Thousands of U.S. dollars (Note 1) Millions of yen Domestic Business-use assets: Land ························································ Buildings and structures, etc.·················· Idle assets: Land ························································ Buildings and structures, etc.·················· Overseas Buildings and structures, etc.·················· Goodwill ·················································· Trademark rights ····································· 2007 2008 ¥1,389 699 ¥ 939 161 1,159 143 407 801 — ¥4,598 2009 2009 168 605 $ 1,710 6,157 — — 291 58 2,961 590 51 — — ¥1,151 23 1,653 3,275 ¥6,073 234 16,823 33,330 $61,805 ¥ 17. RESTRUCTURING EXPENSES Restructuring expenses are business costs incurred in streamlining the Companies’ operations, including downsizing and withdrawing from brands and businesses that contribute little to profitability. Restructuring expenses for the year ended March 31, 2009 mainly consisted of liquidation expenses of ¥2,689 million ($27,366 thousand) of Shiseido Beautech Co., Ltd. and withdrawing expenses of ¥2,465 million ($25,087 thousand) of THE GINZA boutique business. SHISEIDO ANNUAL REPORT 2009 71 18. SEGMENT INFORMATION (1) Business Segment Information1 The Companies operate principally in the following three business segments. The business segments are classified based on the internal organization of the Companies. The main contents of each business segment are as follows: Domestic Cosmetics: Overseas Cosmetics: Others: Cosmetics division (Production and sale of cosmetics, cosmetic accessories and toiletries) Professional division (Production and sale of beauty salon products, etc.) Healthcare division (Production and sale of health & beauty foods and over-the-counter drugs) Cosmetics division (Production and sale of cosmetics, cosmetic accessories and toiletries) Professional division (Production and sale of beauty salon products, etc.) Frontier Sciences division (Production and sale of cosmetic ingredients, medical-use pharmaceuticals, and beauty therapy cosmetics) Others (Sale of clothing and accessories, operation of restaurants and other) The business segment information of the Companies for the years ended March 31, 2007, 2008 and 2009 is as follows: Millions of yen 2007 Net sales Sales to outside customers ·············· Intersegment sales or transfers ········ Total ················································ Operating expenses2 ······················· Operating income3,4 ························· Total assets5,6 ·································· Depreciation7 ··································· Impairment loss7 ····························· Capital expenditure7························· Domestic Cosmetics Overseas Cosmetics Others ¥447,557 6,232 ¥453,789 416,919 ¥ 36,870 ¥275,739 ¥ 14,362 ¥ 2,115 ¥ 12,150 ¥224,320 1,347 ¥225,667 215,222 ¥ 10,445 ¥238,773 ¥ 7,617 ¥ 1,255 ¥ 8,739 ¥22,717 23,113 ¥45,830 43,585 ¥ 2,245 ¥80,275 ¥ 6,519 ¥ 1,228 ¥ 5,463 Subtotal ¥694,594 30,692 ¥725,286 675,726 ¥ 49,560 ¥594,787 ¥ 28,498 ¥ 4,598 ¥ 26,352 Elimination/ corporate — ¥ (30,692) ¥ (30,692) (31,137) ¥ 445 ¥145,046 ¥ (23) — ¥ 14 Consolidation ¥694,594 — ¥694,594 644,589 ¥ 50,005 ¥739,833 ¥ 28,475 ¥ 4,598 ¥ 26,366 Millions of yen 2008 Net sales Sales to outside customers ·············· Intersegment sales or transfers ········ Total ················································ Operating expenses2 ······················· Operating income3,4 ························· Total assets5,6 ·································· Depreciation7 ··································· Impairment loss7 ····························· Capital expenditure7························· Domestic Cosmetics Overseas Cosmetics Others ¥439,021 6,471 ¥445,492 402,362 ¥ 43,130 ¥257,963 ¥ 14,133 ¥ 1,080 ¥ 14,756 ¥263,703 1,771 ¥265,474 247,600 ¥ 17,874 ¥257,508 ¥ 8,944 ¥ 51 ¥ 12,261 ¥20,761 19,487 ¥40,248 38,253 ¥ 1,995 ¥61,123 ¥ 4,630 ¥ 20 ¥ 2,649 Subtotal ¥723,485 27,729 ¥751,214 688,215 ¥ 62,999 ¥576,594 ¥ 27,707 ¥ 1,151 ¥ 29,666 Elimination/ corporate — ¥ (27,729) ¥ (27,729) (28,195) ¥ 466 ¥ 99,270 ¥ 3 — ¥ 72 Consolidation ¥723,485 — ¥723,485 660,020 ¥ 63,465 ¥675,864 ¥ 27,710 ¥ 1,151 ¥ 29,738 Millions of yen 2009 Net sales Sales to outside customers ·············· Intersegment sales or transfers ········ Total ················································ Operating expenses2 ······················· Operating income3,4 ························· Total assets5,6 ·································· Depreciation7 ··································· Impairment loss7 ····························· Capital expenditure7························· 72 SHISEIDO ANNUAL REPORT 2009 Domestic Cosmetics Overseas Cosmetics Others ¥412,338 5,601 ¥417,939 384,935 ¥ 33,004 ¥251,744 ¥ 17,390 ¥ 750 ¥ 15,546 ¥260,916 1,734 ¥262,650 247,656 ¥ 14,994 ¥224,091 ¥ 9,241 ¥ 5,071 ¥ 13,223 ¥17,002 11,552 ¥28,554 27,073 ¥ 1,481 ¥53,358 ¥ 1,621 ¥ 252 ¥ 621 Subtotal ¥690,256 18,887 ¥709,143 659,664 ¥ 49,479 ¥529,193 ¥ 28,252 ¥ 6,073 ¥ 29,390 Elimination/ corporate — ¥(18,887) ¥(18,887) (19,322) ¥ 435 ¥ 77,376 ¥ 37 — ¥ 72 Consolidation ¥690,256 — ¥690,256 640,342 ¥ 49,914 ¥606,569 ¥ 28,289 ¥ 6,073 ¥ 29,462 Notes to the Consolidated Financial Statements Thousands of U.S. dollars (Note 1) 2009 Net sales Sales to outside customers ·············· Intersegment sales or transfers ········ Total ················································ Operating expenses2 ······················· Operating income3,4 ························· Total assets5,6 ·································· Depreciation7 ··································· Impairment loss7 ····························· Capital expenditure7························· Domestic Cosmetics Overseas Cosmetics Others Subtotal Elimination/ corporate Consolidation $4,196,397 57,002 $4,253,399 3,917,515 $ 335,884 $2,562,019 $ 176,980 $ 7,633 $ 158,213 $2,655,363 17,647 $2,673,010 2,520,415 $ 152,595 $2,280,592 $ 94,046 $ 51,608 $ 134,571 $173,031 117,566 $290,597 275,524 $ 15,073 $543,029 $ 16,497 $ 2,564 $ 6,320 $7,024,791 192,215 $7,217,006 6,713,454 $ 503,552 $5,385,640 $ 287,523 $ 61,805 $ 299,104 — $(192,215) $(192,215) (196,642) $ 4,427 $ 787,462 $ 377 — $ 733 $7,024,791 — $7,024,791 6,516,812 $ 507,979 $6,173,102 $ 287,900 $ 61,805 $ 299,837 Notes: 1. Effective for the year ended March 31, 2007, the Company has reclassified business segment reporting from “cosmetics, ““toiletries”and “others” to “domestic cosmetics,” “overseas cosmetics” and “others.” • “Cosmetics” includes toiletries, beauty salon products, health & beauty foods, and over-the-counter drugs, which had previously been included in “toiletries” and “others” segments. • “Cosmetics” with its wider product domain is divided into domestically-operated “domestic cosmetics” and overseas-operated “overseas cosmetics.” • “Others” include medical-use drugs, clothing, accessories, and other businesses that are not included in the scope of “domestic cosmetics” and “overseas cosmetics.” Through these changes, segments are reclassified to reflect the integration of cosmetics with its peripheral businesses and other internal organizational changes, and to clarify overseas cosmetics business results. 2. Effective for the year ended March 31, 2007, the Company has reassessed the segment allocation of its operating expenses. Certain administrative expenses and basic research and development expenses, etc., which had previously been included under the Elimination/corporate line as unallocatable operating expenses, are now allocated to each segment. The Company also redefined certain intersegment transactions. By allocating all administrative expenses to each business segment, these changes aim to provide a more appropriate presentation and disclosure of business segment results, in line with the reclassification in business segment reporting. 3. Effective from the year ended March 31, 2009, the Company has applied “Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements.” As a result of this change, operating income in the Overseas Cosmetics business segment decreased ¥1,095 million ($11,144 thousand) for the year ended March 31, 2009. 4. Effective from the year ended March 31, 2009, the Company and its domestic subsidiaries have applied “Accounting Standard for Lease Transactions” and “Guidance on Accounting Standard for Lease Transactions.” As a result of this change, operating income in the Domestic Cosmetics business segment increased ¥207 million ($2,107 thousand), operating income in the Overseas Cosmetics business segment increased ¥65 million ($661 thousand), and operating income in the Others business segment increased ¥13 million ($132 thousand) for the year ended March 31, 2009. 5. Previously, deferred tax assets were included as corporate assets. Effective from the year ended March 31, 2009, however, such assets are classified by business segment, in order to better clarify assets that should be controlled by the relevant business segment. Business segment information for years ended March 31, 2007 and 2008 have been restated to reflect this change in allocation of deferred tax assets adopted from the year ended March 31, 2009. 6. Corporate assets included in the Elimination/corporate line item as of March 31, 2007, 2008 and 2009 were ¥148,859 million, ¥101,942 million and ¥79,411 million ($808,172 thousand), consisting mainly of financial assets of the Company (cash and time deposits, short-term investments in securities, and investments in securities) and assets related to administrative operations. 7. Depreciation, impairment loss and capital expenditure include amounts relating to long-term prepaid expenses. (2) Geographic Segment Information Segmentation between countries and regions is based on geographic proximity. Major countries and regions besides Japan are as follows: Americas: United States, Canada, Brazil Europe: France, Italy, Germany, Spain Asia/Oceania: China (including Hong Kong), Taiwan, South Korea, Southeast Asia, Australia The geographic segment information of the Companies for the years ended March 31, 2007, 2008 and 2009 is as follows: Millions of yen 2007 Japan Net sales Sales to outside customers·········· Intersegment sales or transfers ··· Total ················································ Operating expenses1 ······················· Operating income2,3 ························· Total assets4,5 ·································· ¥471,205 22,116 ¥493,321 465,986 ¥ 27,335 ¥377,052 Americas Europe ¥51,730 8,139 ¥59,869 57,060 ¥ 2,809 ¥60,300 ¥88,364 4,335 ¥92,699 86,388 ¥ 6,311 ¥97,797 Asia/Oceania ¥83,295 112 ¥83,407 72,195 ¥11,212 ¥74,597 Subtotal ¥694,594 34,702 ¥729,296 681,629 ¥ 47,667 ¥609,746 Elimination/ corporate — ¥ (34,702) ¥ (34,702) (37,040) ¥ 2,338 ¥130,087 Consolidation ¥694,594 — ¥694,594 644,589 ¥ 50,005 ¥739,833 Millions of yen 2008 Japan Net sales Sales to outside customers·········· Intersegment sales or transfers ··· Total ················································ Operating expenses1 ······················· Operating income2,3 ························· Total assets4,5 ·································· ¥460,714 25,898 ¥486,612 454,827 ¥ 31,785 ¥343,461 Americas ¥56,559 9,007 ¥65,566 61,572 ¥ 3,994 ¥57,347 Europe Asia/Oceania Subtotal ¥103,775 5,092 ¥108,867 99,881 ¥ 8,986 ¥107,343 ¥102,437 154 ¥102,591 86,711 ¥ 15,880 ¥ 86,996 ¥723,485 40,151 ¥763,636 702,991 ¥ 60,645 ¥595,147 Elimination/ corporate — ¥ (40,151) ¥ (40,151) (42,971) ¥ 2,820 ¥ 80,717 Consolidation ¥723,485 — ¥723,485 660,020 ¥ 63,465 ¥675,864 SHISEIDO ANNUAL REPORT 2009 73 Notes to the Consolidated Financial Statements Millions of yen 2009 Japan Net sales Sales to outside customers·········· Intersegment sales or transfers ··· Total ················································ Operating expenses1 ······················· Operating income2,3 ························· Total assets4,5 ·································· ¥429,963 25,326 ¥455,289 436,856 ¥ 18,433 ¥337,164 Americas ¥50,657 8,297 ¥58,954 55,678 ¥ 3,276 ¥44,388 Europe Asia/Oceania Subtotal ¥100,034 6,150 ¥106,184 97,926 ¥ 8,258 ¥ 80,642 ¥109,602 182 ¥109,784 93,005 ¥ 16,779 ¥ 80,648 ¥690,256 39,955 ¥730,211 683,465 ¥ 46,746 ¥542,842 Elimination/ corporate — ¥(39,955) ¥(39,955) (43,123) ¥ 3,168 ¥ 63,727 Consolidation ¥690,256 — ¥690,256 640,342 ¥ 49,914 ¥606,569 Thousands of U.S. dollars (Note 1) 2009 Net sales Sales to outside customers·········· Intersegment sales or transfers ··· Total ················································ Operating expenses1 ······················· Operating income2,3 ························· Total assets4,5 ·································· Japan Americas Europe Asia/Oceania $4,375,768 257,745 $4,633,513 4,445,919 $ 187,594 $3,431,346 $515,540 84,439 $599,979 566,640 $ 33,339 $451,740 $1,018,055 62,589 $1,080,644 996,601 $ 84,043 $ 820,700 $1,115,428 1,852 $1,117,280 946,519 $ 170,761 $ 820,761 Subtotal Elimination/ corporate Consolidation $7,024,791 — $7,024,791 406,625 $(406,625) — $7,431,416 $(406,625) $7,024,791 6,955,679 (438,867) 6,516,812 $ 475,737 $ 32,242 $ 507,979 $5,524,547 $ 648,555 $6,173,102 Notes: 1. Effective for the year ended March 31, 2007, the Company has reassessed the segment allocation of its operating expenses. Certain administrative expenses and basic research and development expenses, etc., which had previously been included under the Elimination line as unallocatable operating expenses, are now allocated to each segment. The Company also redefined certain intersegment transactions. By allocating all administrative expenses to each geographic segment, these changes aim to provide a more appropriate presentation and disclosure of geographic segment results, in line with the reclassification in geographic segment reporting. 2. Effective from the year ended March 31, 2009, the Company has applied “Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements.” As a result of this change, operating income in the Americas decreased ¥734 million ($7,470 thousand) and operating income in Asia/Oceania decreased ¥361 million ($3,674 thousand) for the year ended March 31, 2009. 3. Effective from the year ended March 31, 2009, the Company and its domestic subsidiaries have applied “Accounting Standard for Lease Transactions” and “Guidance on Accounting Standard for Lease Transactions.” As a result of this change, operating income in Japan increased ¥285 million ($2,900 thousand) for the year ended March 31, 2009. 4. Previously, deferred tax assets were included as corporate assets. Effective from the year ended March 31, 2009, however, such assets are classified by geographic segment, in order to better clarify assets that should be controlled by the relevant geographic segment. Geographic segment information for years ended March 31, 2007 and 2008 have been restated to reflect this change in allocation of deferred tax assets adopted from the year ended March 31, 2009. 5. Corporate assets included in the Elimination/corporate line as of March 31, 2007, 2008 and 2009 were ¥148,859 million, ¥101,942 million and ¥79,411 million ($808,172 thousand), consisting mainly of financial assets of the Company (cash and time deposits, short-term investments in securities, and investments in securities), and assets related to administrative operations. (3) Overseas Sales* Overseas sales of the Companies (which represent the exports made by the Company and its domestic consolidated subsidiaries and sales (other than exports to Japan) of its overseas consolidated subsidiaries) for the years ended March 31, 2007, 2008 and 2009, are as follows: Thousands of U.S. dollars (Note 1) Millions of yen Overseas sales: Americas ······················································· Europe ··························································· Asia/Oceania ············································ ...................................................... Percentage of such sales against consolidated net sales ······························· 2007 2008 2009 2009 ¥ 53,969 79,326 91,503 ¥224,798 ¥ 59,333 92,785 112,146 ¥264,264 ¥ 54,859 88,550 118,595 ¥262,004 $ 558,304 901,181 1,206,951 $2,666,436 32.4% 36.5% 38.0% 38.0% *** Classification of overseas sales is determined by geographical location. 19. SUBSEQUENT EVENT (Acquisition of Treasury Stock) At its meeting held on April 30, 2009, the Board of Directors passed a resolution to purchase the Company’s treasury stock under Article 156 of the Corporation Law of Japan, as applied pursuant to Article 165-3 of the same law, and implemented, as detailed below. (1) Reason for acquisition To facilitate flexible capital strategies and bolster shareholder returns in response to changing business conditions (2) Details of acquisition (1) Class of shares acquired: Common stock (2) Total number of shares acquired: 4,000 thousand shares (3) Aggregate acquisition price of shares: ¥6,752 million ($68,716 thousand) (4) Acquisition date: May 12, 2009 (5) Method of acquisition: Purchase order placed through Off-Auction Own Share Repurchase Trading of the Tokyo Stock Exchange Trading of the Tokyo Stock Exchange Trading Network System (ToSTNeT-3) 74 SHISEIDO ANNUAL REPORT 2009 Independent Auditors’ Repor t To the Shareholders and Board of Directors of Shiseido Company, Limited: We have audited the accompanying consolidated balance sheets of Shiseido Company, Limited and consolidated subsidiaries as of March 31, 2009 and 2008, and the related consolidated statements of income, changes in net assets and cash flows for each of the three years in the period ended March 31, 2009, expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to independently express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Shiseido Company, Limited and subsidiaries as of March 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2009, in conformity with accounting principles generally accepted in Japan. Without qualifying our opinion, we draw attention to the following: (1) As discussed in Note 2(27) to the consolidated financial statements, effective for the year ended March 31, 2007, Shiseido Company, Limited applied Practical Solution on Application of Control Criteria and Influence Criteria to Investment Associations. (2) As discussed in Note 18(1) to the consolidated financial statements, Shiseido Company, Limited changed the classification of business segments in the year ended March 31, 2007. The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31, 2009 are presented solely for convenience of the reader. Our audit also included the translation of yen amounts into U.S. dollars and, in our opinion, such translation has been made on the basis described in Note 1 to the consolidated financial statements. Tokyo, Japan June 24, 2009 SHISEIDO ANNUAL REPORT 2009 75 Investor Information (As of March 31, 2009) Number of Shareholders 37,426 Common Shares Issued and Outstanding 410,000,000 (including 8,489,386 in treasury stock) Principal Shareholders Shareholders Mizuho Bank, Ltd. Japan Trustee Services Bank, Ltd. (Trust Account) State Street Bank and Trust Company 505223 The Master Trust Bank of Japan, Ltd. (Trust Account) Japan Trustee Services Bank, Ltd. (Trust Account 4G) The Bank of New York Mellon as Depositary Bank for DR Holders* Asahi Mutual Life Insurance Company Mizuho Corporate Bank, Ltd. NIPPONKOA Insurance Company, Ltd. Nippon Life Insurance Company Number of shares held (thousands) Percentage of shareholding 21,226 19,309 18,258 16,480 16,234 14,199 12,079 11,382 11,277 9,747 5.17 4.70 4.45 4.01 3.95 3.46 2.94 2.77 2.75 2.37 Composition of Shareholders (by number of shares) Other Japanese Companies 5.16% Treasury Stock 2.07% Securities Companies Foreign Investors 1.69% 27.66% Financial Institutions Individuals 44.64% 18.76% In addition to the above, Shiseido Company, Limited holds 8,489 thousand shares of treasury stock. * The Bank of New York Mellon as Depositary Bank for Depositary Receipt Holders (formerly named Hero & Co.) is an owner of record for The Bank of New York Mellon, a depositary for American depositary receipts. Monthly Share Price Range and Trading Volume (¥) 3,500 Share Price Trading Volume Composition of Shareholders (%) (Nikkei Stock Average) Nikkei Stock Average (Closing Price) 3,000 14,000 2,500 10,000 6,000 2,000 (Thousands of shares) 1,500 120,000 1,000 80,000 500 40,000 04/06 04/07 04/08 (By number of shareholders) Foreign Investors Individuals Financial Institutions Securities Companies Other Japanese Companies Treasury Stock 0 0 (By number of shares) Foreign Investors Individuals Financial Institutions Securities Companies Other Japanese Companies Treasury Stock 18,000 03/09 2008 28.08 17.08 46.23 2.00 5.17 1.41 2009 27.66 18.76 44.64 1.69 5.16 2.07 2008 1.41 96.32 0.48 0.11 1.65 0.00 2009 1.40 96.30 0.48 0.17 1.62 0.00 Note: Shiseido acquired 2,211,000 of its own shares at an aggregate acquisition price of ¥4,488,330,000 in November 2008. Stock Price Indicators Price/Earnings Ratio (PER) Price/Book Value Ratio (PBR) ( Times) 80 Dividend Yield (Times) 3.0 63.7 (%) 4.0 2.8 60 39.3 40 2.4 2.5 30.6 3.5 2.5 3.5 3.0 29.9 2.0 20 1.7 1.6 0 2.5 2.0 1.5 (20) 1.7 1.5 1.4 1.3 03/06 03/07 1.3 1.0 1.0 (40) 0.5 (60) (80) (65.8) 03/05 0.5 0.0 03/06 03/07 03/08 03/09 Note: Price/Earnings Ratio = Closing stock price at fiscal year-end/Net income per share 76 SHISEIDO ANNUAL REPORT 2009 0.0 03/05 03/06 03/07 03/08 03/09 Note: Price/Book Value Ratio = Closing stock price at fiscal year-end/Net assets per share 03/05 03/08 03/09 Note: Dividend Yield = Cash dividends per share/ Closing stock price at fiscal year-end Corporate Information (As of March 31, 2009) Head Office Stock Listings Shiseido Company, Limited 5-5, Ginza 7-chome, Chuo-ku Tokyo 104-0061, Japan Tel: +81-3-3572-5111 Common Stock: Tokyo Stock Exchange (Code: 4911) American Depositary Receipts: U.S. Over-the-Counter Accounting Auditors KPMG AZSA & Co. Foundation September 17, 1872 Share Registrar Incorporation The Chuo Mitsui Trust and Banking Company, Ltd. 33-1, Shiba 3-chome, Minato-ku, Tokyo 105-8574, Japan June 24, 1927 American Depositary Receipts Capital ¥64,506,725,140 Number of Employees 3,500 (28,810 for the Shiseido Group) Fiscal Year-End March 31 Shareholders’ Meeting CUSIP: 824841407 Ratio (ADR:ORD): 1:1 Exchange: OTC (Over-the-Counter) Symbol: SSDOY Depositary: The Bank of New York Mellon 101 Barclay Street, New York, NY 10286, U.S.A. Tel: +1 (212) 815-3874 U.S. toll free: (888) 269-2377 http://www.adrbnymellon.com The Ordinary General Meeting of Shareholders is normally held in June in Tokyo. For further information, please contact Investor Relations, Financial Department Shiseido Company, Limited 6-2, Higashi-shimbashi 1-chome Minato-ku, Tokyo 105-8310, Japan F a x : +81-3-6218-5544 E-mail: irmail@to.shiseido.co.jp Website English Edition: http://www.shiseido.co.jp/e/ Japanese Edition: http://www.shiseido.co.jp/ This mark certifies use of the Certificate of Green Electricity through Solar Power provided by Tuvalu-Forest Corporation. SHISEIDO ANNUAL REPORT 2009 77 2009 2009 Building Building Building Momentun Momentun Momentun as asaaGlobal Global as a Global Player PlayerPlayer Representing Representing Representing Asia Asiawith with Asiaits its with Origins Origins its Origins ininJapan Japan in Japan 2 2 0 0 0 0 9年3月期 9年3月期 2009年3月期 2009 00 09 9 20 2