Message from the President & CEO

Look forward to the Kao Group's future growth as it makes its presence felt as a company that helps to resolve social issues.

Michitaka Sawada
President and Chief Executive Officer

As stated in the "Kao Way," which is our corporate philosophy, the mission of the Kao Group is to strive for the wholehearted satisfaction and enrichment of the lives of people globally and to contribute to the sustainability of the world. Under this mission, we have made numerous value offerings through our products and services since our founding. In the future, Kao intends to become a company with a global presence, exerting a substantial impact on the world by helping to resolve social issues while continuing to take on challenges. Maximizing the use of our assets, such as our human resources, R&D assets and brands, is important for achieving this objective. We will continue to create new value for the future and offer it to the world through "essential research." Day in and day out, we will work diligently toward the realization of our goal of becoming a company with a global presence.

In 2014, under Kao Group Mid-term Plan 2015 (K15) we made great strides toward our vision for the Group's future. We made progress in building the sustainable growth model we have targeted by maximizing the use of Kao Group assets to enhance our capabilities to increase profits.
We drew up Kao Group Mid-term Plan 2015 (K15) in 2013, and 2015 is its final year. In 2014, not only were we able to achieve numerical targets, but we were also able to make structural changes toward the realization of K15. We had been offering consumers high-value-added products, which became more readily accepted by consumers as the market changed. Under these circumstances, we made substantial progress toward building the sustainable growth model I have been insisting on: a post-deflation growth model for transformation to a more profitable structure, with the capabilities to generate profits by maximizing the use of our assets. It is a virtuous cycle in which the profits we generate are proactively allocated to investments that lead to growth in market share and sales, which in turn provides profit exceeding the amount of investment. For example, even if an unforeseen event occurs, we can overcome it and continue to generate profits that can be used for other investments for further growth. The Kao Group has many assets accumulated by our predecessors, in areas including research and development, human resources, goods, information and brands. To start with, we are making better use of our human resources. We have given all employees a sense of ownership and an awareness of maximizing the use of the assets they possess. As a result, among other factors, employee attitudes have changed. They are able to think and act on-site to make forward-looking proposals that utilize their assets. In this way, we are gradually shifting to a structure that generates profits, or in other words, enhancing our capabilities to increase profits.

As maximizing use of assets has taken root throughout the Kao Group, we have enhanced our capabilities to increase profits. The result has been progress in building our sustainable growth model. At the same time, we continuously invest in research and development, including "essential research." Building the foundation for this sustainable growth model was our primary accomplishment in 2014. Capital expenditures were at the ¥50 billion level until fiscal 2012, but increased to the ¥60 billion level since K15 began. During 2014, we increased production capacity in Japan for baby diapers, which are growing in sales, and for the Fabric and Home Care Business, to reinforce this business. Outside Japan, we built our second consumer products plant in the growing market of Indonesia as part of the global expansion of the Consumer Products Business. Our efforts to strengthen the Chemical Business included the establishment of new plants in Indonesia and China. Moreover, we proactively increased investment in marketing new and improved high-value-added products, among other measures to respond to the last-minute surge in demand before the consumption tax rate increase in Japan in April 2014. As a result, the increase in profits from sales growth exceeded the increase in investment. The Kao Group's share of the household and personal care products market in Japan has increased compared with the previous year. This is a sign that we are shifting to the sustainable growth model that I am determined to establish.

Regarding Kanebo Cosmetics brightening products containing the ingredient Rhododenol, the Kao Group continues to respond in a sincere manner. Kanebo Cosmetics has been making individual visits to people who have experienced vitiligo-like symptoms and offering support for their recovery and compensation.

In 2015, we will build our foundation for the future. We are poised for a major leap to achieve the targets of K15, particularly the operating income target of ¥150 billion.
K15 has reached its final year in 2015. The plan was drawn up by visualizing the Kao Group's desired state, then looking backward to plot out the steps to get there. This will be a year of looking a decade or two into the future to establish a foundation for long-term application of the sustainable growth model we have been building.
In 2015, as the final year of K15, it is imperative that we (1) break previous records for net sales and profits and (2) achieve the numerical management targets of ¥1.4 trillion in net sales, ¥150 billion in operating income and an overseas sales ratio of 30 percent or more. These key performance indicators have not changed since the initial announcement.

Profitable growth and the creation of new assets are priority themes for achieving these targets, with a sustainable growth model driven by making maximum use of the Kao Group's assets and capabilities to generate profits. To reinforce our Consumer Products Business in Japan, we will proactively launch new and improved products and invest in marketing. We will also work to restore the cosmetics business through growth of the distinctive Sofina and Kanebo brands, and take measures to reinforce the Healthya brand of functional drinks. For further growth in the Consumer Products Business in Asia, we will enhance our efforts for the premium segment while proactively conducting business targeting the middle-class consumer segment. In the Consumer Products Business in the Americas and Europe, where we are facing challenges, we will improve profitability. In the Chemical Business, we will respond to changes in the global operating environment by proposing high-value-added products and further reinforcing oleo chemicals.

We will focus on "essential research" with our sights set decades into the future to help resolve social issues globally.
Setting its sights on the future, the Kao Group will focus efforts on the social issues where it can best maximize its assets: the environment, health and the aging society, to which we have added hygiene.

In the area of the environment, for example, Eco-Technology Research Center in Wakayama Prefecture in Japan, has been conducting research on algae as a next- generation energy source. In the area of health, we have already begun developing health promotion solutions including health-related products and measuring instruments. For the aging society, we have been conducting a business that provides a wide range of products for active seniors, not only incontinence products, employing universal design and other measures. For hygiene, the new area on our list, we intend to use the technologies we have accumulated in Japan to make a contribution to consumers worldwide.
Moreover, to achieve our vision of becoming a company with a global presence, we will refine our current strategies to set the direction of our mid-term growth strategies following K15. There are still countries where the Kao Group does not do business, and we want to enter those markets with all due speed to accelerate the global expansion of the Consumer Products Business. Growth in Japan will be indispensable for this expansion. Japan's low birthrate and aging society are said to be causing the market to contract, but I believe we can generate growth by anticipating changes in lifestyles and making value offerings that are a half-step ahead of those changes. Consumer spending is improving, and we should be able to grow by further enhancing the market positions we have already established. In Japan, we are facing the social issues of a low birthrate and an aging society ahead of other countries. By successfully dealing with these issues and accumulating expertise under these conditions in Japan, we will be equipped to tackle them on a global scale. We also intend to quickly return the cosmetics business to a growth path. In the Chemical Business, we aim to achieve sales expansion and stable profitability.

I recognize that these strategies will require the training of expert personnel and continuous investment in "essential research." By expert personnel, I mean employees who can link related parts of our functions: research with operations, technologies with business, local sites with the head office, and so on. The key will be to train expert personnel who can generate comprehensive value by bringing together other employees who display value in specialized fields. We are already conducting measures for this purpose within the Kao Group, such as the Innovation Creation Project and the Global Expansion Project. In addition, "essential research" is the most important element in creating value for the future. Without a doubt, the Kao Group's lifestyle proposals to date have originated from this research. It is one of the strengths we must maximize for future growth, and we will continue to prioritize investment in it to develop our ability to create value for the future.

In 2014, we made substantial changes to our corporate governance structure to attain our initial objectives: enhancing discussions of strategies from a global perspective by the Board of Directors, speedy decision-making and separation of supervision and execution.
To continue sustainable development, the Kao Group has been working to enhance its corporate governance through innovation.* Our new structure has been in operation since March 2014. We have reinforced the outside perspective of the Board of Directors with an equal number of inside and outside members, and an Independent Outside Director as chairman. Moreover, two of the Outside Directors are Independent Directors. We have also accelerated decision-making, further clarified the division of roles between supervision and execution, and delegated authority. Receiving valuable opinions from the diverse perspectives of the Outside Directors and Outside Audit & Supervisory Board Members has deepened discussions of the Kao Group's future direction and other matters. It also leads to engagement with our investors from a long-term perspective, which in turn increases our corporate value.
* "Innovation" is one of the values of the Kao Way.

Look forward to Kao's growth decades into the future.
The targeted sustainable growth model based on maximizing the use of the Kao Group's assets and our capabilities to generate profits has begun to function, and we are now able to invest for our future growth. We will continue to prioritize the uses of the cash flow we generate each year as we have in the past.

Moreover, the Kao Group was the first in Japan to introduce Economic Value Added (EVA)* as a management indicator to increase corporate value. We believe EVA management generates and improves "true" profit that exceeds the cost of capital. We will work to increase corporate value by continuously improving EVA through profitable growth. Furthermore, because EVA management keeps us aware of the cost of capital at all times, it improves ROE.
* EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co.

The Kao Group will voluntarily implement International Financial Reporting Standards from 2016 based on its judgment that standardizing accounting within the Group will help to improve the quality of Group management. The implementation will enable management based on standardized frameworks and information in each Kao Group company and business, thus strengthening our management foundation to improve our corporate value as a global company.
The Kao Group will increase its corporate value by creating value for the future from the perspective of consumers and working to help resolve social issues, primarily in the areas of the environment, health, the aging society and hygiene. By increasing value for our customers, employees and shareholders in a balanced fashion, we aim to achieve profitable growth and contribute to a sustainable society. The Kao Group is in the process of building its sustainable growth model to drive future growth. Our shareholders can look forward to Kao's growth as we set our sights decades into the future.

April 2015

President and Chief Executive Officer
Kao Corporation