Message from the President & CEO

The Kao Group Mid-Term Plan 2015 (K15) got off to an excellent start in 2013, with record operating income. We will continue to focus on innovation to achieve the targets of K15 and become a company with a global presence.

Please begin by briefly discussing the voluntary recall at Kanebo Cosmetics and subsequent Kao Group initiatives.

Kao's subsidiary Kanebo Cosmetics decided to implement a voluntary recall of certain brightening products in Japan and some Asian countries* because of cases of vitiligo-like symptoms on the skin of some customers who used the products. We are wholeheartedly supporting the recovery of all those who experienced symptoms. This has included visiting individuals to confirm their conditions and establishing a follow-up system.

In January 2014, I also assumed direct control of our new quality assurance organization so I can be closely involved. The entire Kao Group is working to ensure even higher levels of safety and reliability in its products.

* On July 4, 2013, Kanebo Cosmetics Inc., Lissage Ltd. and e'quipe, Ltd. of the Kao Group announced a voluntary recall of brightening products containing the quasi-drug-ingredient Rhododenol, which was approved by the Japanese Ministry of Health, Labour and Welfare in accordance with the Pharmaceutical Affairs Act after passing extensive safety tests.

Please discuss your goals for a Kao Group that evolves through innovation.
The primary goal of the Kao Group is to become a company with a global presence. I want the Kao Group to achieve recognition as a company and a manufacturer that makes distinctive value offerings. That is how we can realize the Kao Way, our corporate philosophy, which is to strive for the wholehearted satisfaction and enrichment of the lives of people globally and to contribute to the sustainability of the world. Innovation enables the value offerings that truly bring the Kao Group's core philosophies to life.

Over the years, the Kao Group has expanded its Consumer Products Business to include cleanliness, beauty and health. We used to directly transform cleanliness technology into products and value, but today, technology alone does not satisfy consumer expectations. As we expand in beauty and health, we also see that technology no longer directly equates to value. Rather, we need to develop comprehensive offerings that showcase the value offered by technology. We must also achieve meaningful innovation by integrating incremental insights. These approaches will enable the Kao Group to create innovative products and services that enrich people's lives and society.

Leading-edge research is vital for the development of excellent products. However, product development alone does not define our ability to deliver distinctive value offerings. Offerings that are a step ahead of their time are not readily accepted in the consumer products business. We need to make value offerings that are a "half-step ahead" to innovate successfully.

The rising standard of living around the world is adding to the challenge of making value offerings. We therefore need to appeal to consumers through a wide range of innovations that will enrich society, including product and marketing innovations.

The Kao Group launched its K15 mid-term plan in 2013. What were the first-year results, including progress of K15's three growth strategies?
In 2013, for the first time ever the Kao Group announced its mid-term plan to stakeholders.

The global economy continued its anemic recovery. The pace of growth slowed in emerging countries, while the U.S. economy expanded and Europe showed signs of an upturn despite continuing weakness.

In Japan, the economy recovered gradually as personal consumption picked up due to positive expectations for economic measures. In addition, the decline in consumer purchase prices appeared to have bottomed out. Market conditions improved progressively through the year, as consumer became more accepting of higher prices for value offered by household and personal care products.

We concentrated on maximizing the use of Kao Group assets during 2013. Examples from our R&D operations included expanding the application of technology developed for a particular product to additional products. We also revitalized existing products by transforming our approach to communicating product value. We began seeing results during 2013 from our drive to maximize asset use, and expect to see more in the future.

We generated growth in sales and earnings for the fourth consecutive year, excluding the impact of the change in fiscal year during fiscal 2012, and also exceeded our target for record operating income. The overseas sales ratio, which is the proportion of net sales to foreign customers, rose to 30.9 percent, in part because of the depreciation of the yen.

We also launched three strategies for generating profitable growth and internal projects to support them. I will briefly outline the progress of these strategies.

Three Growth Strategies
Strategy 1
Expand the Consumer Products Business globally
We categorized our markets as mature or growth, then steadily began expanding sales.

The Consumer Products Business in Asia performed well and drove global expansion. I would like to see the Kao Group maintain the overseas sales ratio at 30 percent or higher, regardless of exchange rate movements. In growth markets, we are focusing on launching laundry detergents, baby diapers and sanitary products for the middle-class consumer segment. During 2013, we launched Merries baby diapers manufactured in China and Attack Power Soaking powder laundry detergent for washing by hand.

Strategy 2
Further reinforce the Fabric and Home Care Business, and accelerate profitable growth in the Beauty Care and Human Health Care Businesses
The Fabric and Home Care Business generated solid growth and increased earnings. With an operating margin of approximately 20 percent, it made the steadiest progress among our business segments. As exemplified by Ultra Attack Neo laundry detergent, the Kao Group demonstrated leadership in changing lifestyles in Japan with new value offerings. Laundry detergent performance was also solid in Thailand and Indonesia, demonstrating that progress in reinforcing this business was not limited to Japan.

Conditions were challenging in cosmetics due to the voluntary recall at Kanebo Cosmetics. Excluding Kanebo Cosmetics, however, the Beauty Care Business made progress. Baby diapers led growth in the Human Health Care Business, and sales of Laurier sanitary napkins continued to drive growth in Thailand and Indonesia. Moreover, MegRhythm steam eye mask was a hit in Japan and Hong Kong. This product created a new market with its concept of improving blood circulation.

Our marketing activities also supported sales growth by anticipating consumer and lifestyle changes with "half-step ahead" proposals driven by fresh analyses of the data we have collected.

Strategy 3
Reinforce the Chemical Business
The Chemical Business serves a wide array of industries globally. It also enhances the competitiveness of the Kao Group's Consumer Products Business through synergies such as supplying raw materials that add value to consumer products while reducing costs and ensuring stable raw material procurement. Enhancing the Chemical Business and the Consumer Products Business is vital for the Kao Group to grow profitably.

During 2013, market conditions challenged the Chemical Business. The Kao Group strengthened this business by concentrating on increased production and products that use eco-technologies, such as low-temperature fusing toner binder and cleaning agents for steel sheets.

In oleo chemicals, the Kao Group expanded fatty alcohol production facilities and increased sales volume. The Chemical Business has been focusing on acquiring new customers for performance and specialty chemicals. Sales of performance chemicals were firm due to the development and sale of high-value-added products. The specialty chemicals business is responding effectively to structural changes in our customers' industries.

What is your long-term objective?
Our most important long-term objective is to become a company with a global presence, and that means a company that makes distinctive value offerings. Achieving the targets of K15 is just one milestone on the way to that goal. I want the Kao Group to move beyond its accomplishments in 2013 to reach the next level in 2014 so that we can achieve the targets of K15, and we are going to implement a number of measures during 2014 to do so.

We will continue to invest to put our three growth strategies into action. We want to maintain the strong momentum of our businesses in 2013 while investing to enable more aggressive initiatives that will further reinforce the Fabric and Home Care Business and improve performance in the Beauty Care and Human Health Care Businesses. For cosmetics, we will accelerate the turnaround at Kanebo Cosmetics with products that allow people to fully experience beauty with their senses.

The Chemical Business will enhance oleo chemical products by adding value to mitigate fluctuations in the prices of raw materials, and support stable sales. It also aims to expand sales by using creative technologies that address environmental concerns to develop new materials and other products.

Please close with some insights for investors.
In 2013, we formulated the Kao Sustainability Statement to delineate a clear vision for implementing the Kao Way. Moreover, we improved our corporate governance system in March 2014. We have a new team of Board Members and Executive Officers to speed up decision making and strengthen our response to change, and we have an equal number of inside directors and outside directors to heighten transparency and bring external perspectives to the Kao Group.

The Kao Group aims to become a company with a global presence. We will therefore generate sustained profitable growth with distinctive value offerings, and contribute to the sustainability of society by helping to resolve social issues and making social contributions through our business activities. We are confident that we will increase shareholder value by increasing Economic Value Added (EVA), a key Kao Group management indicator. Summarized below, our priorities for deploying free cash flow remain unchanged.

We are excited about the Kao Group's future, and we invite investors to share our enthusiasm.

April 2014

President and Chief Executive Officer
Kao Corporation