Annual Report 2006 Year Ended March 31, 2006 Construct the Foundation for Next Growth Annual Report 2006 Contents Mission Statement 1 Financial Highlights 2 A Message to Our Stakeholders 3 The Mandom Way 8 Harness Group resources 10 Explore Mandom’s uniqueness 12 Contribute to society 16 Product development that creates lifestyle value 18 with consumers, for consumers Research activities that deliver comfort in product quality 26 Pursuit of competitiveness through production and supply 28 Financial Section 31 Management’s discussion & analysis 32 Consolidated financial statements 36 Notes to consolidated financial statements 40 Independent auditors’ report 49 History 50 Outline of the Company 52 Stock Information 53 Cautionary Statement With Respect to Forward-looking Statements This annual report contains forward-looking statements concerning Mandom’s current plans, strategies, beliefs and perfor- mance. These forward-looking statements include statements other than those based on historical fact and represent the assumptions and beliefs of management based on information currently available. Mandom therefore wishes to caution readers that actual results may differ materially from expectations, and that forward-looking statements are subject to a number of foreseen and unforeseen risks and uncertainties. All amounts have been rounded to the nearest whole unit. Mission Statement: Aiming to provide a comfortable lifestyle supported by health and beauty Philosophy The shared ideals set forth below, guide our actions toward realizing the Mandom Group’s management philosophy, which above all aims to serve and benefit society. 1. Active employee participation Mandom encourages all employees to take an active role in every facet of operations, blending indi- vidual responsibility with the willingness to embrace larger roles than those prescribed by job titles, the organization and the company itself. Our workplace thrives on lively intellectual exchange, and is imbued with a spirit of cooperation, creating a dynamic and progressive organization. 2. Creating lifestyle value with consumers, for consumers At Mandom, where everything begins and ends with consumers, four key words form the basis of our philosophy: Health, Cleanliness, Beauty and Enjoyment. We begin by ascertaining the needs of consumers and end by creating consumer value. Our goal is to consistently deliver value to people throughout the world. 3. Enhancement of 3 areas: Lifestyle focus, Business Partner focus, and Brands focus Our fundamental goal is to serve and enhance society through the products and services we supply. To achieve this objective, we constantly strive to deepen our understanding of the changing lifestyles of consumers and the needs of our corporate clients. We also carefully monitor product and service trends, the latest information, technology and consumer preferences. Annual Report 2006 1 Financial Highlights MANDOM Corporation and Consolidated Subsidiaries Years ended March 31 (Millions of yen) 06/3 05/3 04/3 03/3 02/3 Net Sales 47,923 47,546 45,364 45,434 42,086 Operating Income 6,065 6,700 6,680 6,322 5,211 Net Income 3,099 3,211 3,253 2,988 2,176 Total Assets 51,320 47,397 45,474 43,868 38,613 Total Shareholders’ Equity 40,568 38,168 36,687 34,714 29,376 —Return on Equity (ROE) (%) 7.9 8.6 9.1 9.3 7.1 —Earnings per Share (EPS) (¥) 124.36 128.73 130.83 128.32 92.96 —Payout Ratio 48.2 42.7 38.2 39.0 43.0 —Dividend on Equity 3.6 3.5 3.3 3.5 3.1 —Cash Dividends per Share (¥) 60.00 55.00 50.00 50.00 40.00 Net Sales Operating Income Net Income (Millions of yen) (Millions of yen) (Millions of yen) 50,000 7,000 3,500 6,680 6,700 47,546 47,923 6,322 3,253 3,211 45,434 6,065 3,099 45,364 2,988 45,000 6,000 3,000 42,086 5,211 40,000 5,000 2,500 2,176 35,000 4,000 2,000 30,000 3,000 1,500 02/3 03/3 04/3 05/3 06/3 02/3 03/3 04/3 05/3 06/3 02/3 03/3 04/3 05/3 06/3 (%) (%) (%) 02/3 03/3 04/3 05/3 06/3 02/3 03/3 04/3 05/3 06/3 02/3 03/3 04/3 05/3 06/3 rate of rate of rate of change 5.1 8.0 0.2 4.8 0.8 change 2.6 21.3 5.7 0.3 9.5 change 7.5 37.3 8.9 1.3 3.5 Return on Equity (ROE) Earnings per Share (EPS) Payout Ratio/Dividend on Equity(DOE) Payout Ratio DOE (%) (Yen) Payout Ratio(%) DOE(%) 10 140 50 48.2 4.0 9.3 128.32 130.83 128.73 43.0 42.7 9.1 124.36 9 40 39.0 38.2 3.8 8.6 120 8 7.9 30 3.6 3.6 100 3.5 3.5 7.1 92.96 7 20 3.4 80 3.3 6 10 3.2 3.1 5 60 0 3.0 02/3 03/3 04/3 05/3 06/3 02/3 03/3 04/3 05/3 06/3 02/3 03/3 04/3 05/3 06/3 (point) (%) (point) 02/3 03/3 04/3 05/3 06/3 02/3 03/3 04/3 05/3 06/3 change 02/3 03/3 04/3 05/3 06/3 rate of change 0.9 2.2 0.2 0.5 0.7 change 13.9 38.0 2.0 1.6 3.4 Payout Ratio 0.8 4.0 0.8 4.5 5.5 DOE 0.5 0.4 0.2 0.2 0.1 2 A Message to Our Stakeholders Although overseas businesses performed favorably in the fiscal year ended March 2006, leading to higher revenues, profits declined as domestic businesses struggled. We believe that the fiscal year ending March 2007 will be a year of “challenge” and “upfront investment” aimed at a recovery in earnings and future expansion in the scale of business operations. Annual Report 2006 3 Results for the fiscal year ended March 2006 In the fiscal year under review, the Japanese economy continued to recover moderately. This recovery was underpinned by strong corporate earnings and a broadening base of capital investment, as well as a recovery in consumer spending stemming from an improvement in the employment environment and personal income. In the cosmetics industry as well, overall shipment volumes and values improved, average unit sales prices stopped declining, and signs of an emergence from deflation began to appear. In Asian countries outside Japan, where the Mandom Group operates its overseas businesses, economic conditions remained favorable, led by export demand, and consumer spending was also generally robust. However, in some parts of the region, there was a striking slowdown in consumption caused by surging crude oil prices. The fiscal year ended March 2006 marked the first year of Mandom’s eighth Middle-range Planning (MP-8), and in the environ- ment described above, we focused on strengthening and fostering brand power on an integrated basis in Japan and the rest of Asia. At the same time, we promoted the development of products that were able to fulfill the diversifying “wants” of consumers. As a result of these efforts, consolidated net sales for the year under review grew 0.8% year on year to ¥47,923 million. Overseas businesses, the growth engine of the Mandom Group, recorded an 8.5% increase in net sales despite the adverse impact of weaker Southeast Asian currencies. However, domestic net sales posted a 1.8% decline, as a 1.7% rise in net sales at the parent company was offset by a drop in sales resulting from the divestiture of a subsidiary in the previous fiscal year. Consequently, the overseas sales ratio on a consolidated basis was 27.0%, an increase of 2 percentage points from 25.0% in fiscal 2005. This represents generally steady progress toward the target of an overseas sales ratio of at least one-third of total Group sales established under MP-8, and the Company has been implementing various measures to expand the scale of overseas businesses. Sales by Strategic Product Unit (Group-wide sales) were as follows. 1.Gatsby Sales increased ¥1,241 million, or 5.3%, year on year. Summer-season products, such as deodorants and sheet cosmetics, performed strongly both in Japan and overseas: domestic sales rose 4.3% year on year while overseas sales were up 8.5%. Sales volume in Japan and overseas also grew 19.0% to 361 million units, and Gatsby cemented its position as a leading men’s cosmetries brand in the Asian region. 2.Lúcido L Sales declined ¥32 million, or 0.7%. In Japan, although the hair wax series, which underwent a renewal in autumn, registered a robust performance, this was insufficient to offset lower sales associated with sluggish demand in the women’s hair color market itself. Consequently, domestic sales fell 3.9%. Overseas, however, we expanded the network of stores handling Mandom products, especially hair styling products in ASIA NIES and China, which led to a 37.9% increase in overseas sales. 3.Face and Body Products Sales rose ¥1,462 million, or 13.1%. Domestic sales grew 11.6% mainly due to favorable results from Gatsby facial paper and deodorants. Overseas sales climbed 16.9%, thanks to a strong performance by Gatsby face and body products as well as robust sales of Pucelle brand products mainly in the ASEAN region. This segment has steadily solidified its base as it heads toward establishing itself as a mainstay category that will lead to stable earnings in the Group.