Message from the President & CEO

* This message was revised on January 2014, reflecting the correction of business results.


We will achieve the targets of Kao Group Mid-term Plan 2015 (K15) to build a foundation for rapid growth as we take on the challenge of becoming a company with a global presence.



Performance in the Fiscal Period Ended December 31, 2012


In a challenging operating environment both inside and outside Japan, the Kao Group achieved its third consecutive period of increases in sales and operating income in the fiscal period ended December 31, 2012.*1

The year ended December 31, 2012 was challenging in Japan and worldwide due to factors such as the impact of the debt crisis in Europe. In particular, exports to Europe from the ASEAN region and China fell, which in turn impacted Japan and led to a slowdown in domestic production. With additional factors such as delays in recovery and reconstruction after the Great East Japan Earthquake and structural changes in the personal computer market, conditions in Japan were difficult. With a sense of uncertainty about the future, deflation continued, leading to a downturn in consumer sentiment and intensifying price competition.

Although conditions were severe, the Kao Group worked to launch and nurture products with high added value in response to changes in consumer needs based on its concept of Yoki-Monozukuri*2 and promoted cost reduction activities. As a result, the Kao Group was able to finish the fiscal period with reasonable results. Net sales were ¥1,012.6 billion, an increase of 0.4 percent compared with restated FY2011,*3 operating income increased 3.2 percent from restated FY2011 to ¥101.6 billion, and net income rose 1.9 percent from restated FY2011 to ¥52.8 billion. These results represent our third consecutive fiscal period of increases in sales and operating income, and I believe they lay the groundwork for future growth. On closer inspection, it is clear that there was some unevenness in results across the Group. The Consumer Products Business, including overseas operations, offset weak sales and operating income in the Chemical Business.

By segment, sales in the Consumer Products Business were firm, increasing 2.1 percent on a like-for-like*4 basis to ¥833.2 billion.

In the Beauty Care Business, sales of prestige cosmetics were firm and premium skin care products performed well. In the premium hair care product category, however, the performance of shampoos, conditioners, styling and hair coloring products in Japan was weak, as was the performance of styling products in the Americas and Europe. As a result, total sales were on par with restated fiscal 2011. In the Human Health Care Business, overall sales increased as a decrease in sales of food and beverage products and toothpaste in personal health products was offset by growth in sales of sanitary products, particularly baby diapers. Sales in the Fabric and Home Care Business grew, with brisk sales of fabric softeners and bleaches in Japan, and solid performance by home care products in Japan and dishwashing detergent in Asia.

Products that sold strongly and contributed significantly to results for the fiscal period included Merries baby diapers, which performed well in Russia and China as well as in Japan; Flair Fragrance fabric softener; Laurier Active Day Double Comfort easy-to-wash sanitary napkins that have become a major hit product in Indonesia; Jergens Natural Glow, which has captured a substantial share of the self-tanning market; and Goldwell Nectaya ammonia-free hair color, which is free of unpleasant odors and has gained a favorable reputation in hair salons.

On the other hand, sales in the Chemical Business decreased 3.1 percent on a like-for-like basis due to factors including decreased demand in customer industries and selling price adjustments made in connection with lower raw material prices.


*1 Due to a change in the fiscal year end, the term of consolidation for the fiscal period ended December 31, 2012 consists of the nine months from April to December for Kao Corporation and its subsidiaries whose fiscal year end was previously March 31 and the twelve months from January to December for subsidiaries whose fiscal year end was December 31.
*2 The Kao Group defines Yoki-Monozukuri as "a strong commitment by all members to provide products and brands of excellent value for consumer satisfaction." In Japanese, Yoki literally means "good/excellent," and Monozukuri means "development/manufacturing of products."
*3 "Restated fiscal 2011" are figures for the nine-month period from April 1 to December 31, 2011 for Kao Corporation and its subsidiaries whose fiscal year end was previously March 31.
*4 Excludes the effect of currency translation and the impact of the change in financial term.



Free Cash Flow*5 Management

Becoming a company with a global presence first requires prioritizing investments for growth.

I strongly believe these are times that require us to change. Achieving the Kao Group's aim of becoming a company with a global presence is not a matter of simply continuing with our current initiatives. We have already prioritized the major investments, including M&A, that we will make in anticipation of rapid growth. Accordingly, the first step in increasing our corporate value has been our policy of using free cash flow for capital expenditures and M&A for future growth. I am certain this policy will lead to long-term profits for our shareholders and other stakeholders.

As for M&A, we currently have a variety of options to obtain the management resources that are complementary to our existing assets. In addition to brands, some examples include sales channels outside Japan and technologies that are likely to be a good match with our own.

Moreover, we plan to give full consideration to shareholder returns within this overall framework.



The fiscal period ended December 31, 2012 represents the twenty-third consecutive fiscal period we have raised dividends. We plan to achieve profitable growth that will allow us to continue these increases in the future. After taking into account our results, our capital expenditures for investments for growth and payment of dividends, financial conditions in our operating environment and our needs for cash on hand, we consider share repurchases and the repayment of interest-bearing debt. Following careful consideration of these matters, in February 2013 we decided to repurchase stock.


*5 Free cash flow = Net cash provided by operating activities + Net cash used in investing activities



Shareholder Returns

We have raised cash dividends for 23 consecutive fiscal periods and resolved to conduct a share repurchase in the current fiscal year.

In light of our results for the fiscal period, cash dividends increased ¥2.00 per share compared with the previous fiscal year to ¥62.00 per share, for a consolidated payout ratio of 61.3 percent. In addition, to raise capital efficiency and further enhance shareholder returns, Kao Corporation resolved to repurchase its own shares, up to 12.5 million shares or ¥30.0 billion, from February 6 to April 26, 2013. Pursuant to the aforementioned resolution, Kao Corporation completed the purchase of 10.0 million shares at a cost of approximately ¥30.0 billion on April 5, 2013.






Kao Group Mid-term Plan 2015 (K15)

By steadily executing the growth strategies of K15, the Kao Group aims to become a company with a global presence as it works toward both sustained profitable growth with high-value-added products and further contributions to society.

Next, I would like to talk about the Kao Group's mid-term growth strategies.

I want to make the Kao Group a company with a global presence. To do so, both sustained profitable growth and further contributions to society are essential. If we can achieve both of these, we will be able to accomplish the mission of the Kao Group, "to strive for the wholehearted satisfaction and enrichment of the lives of people globally and to contribute to the sustainability of the world" as stated in the Kao Way, our corporate philosophy. Bearing in mind this mission, what we want to achieve and the framework of our targets, we used "backcasting" to create our mid-term plan by defining our approach today in order to attain these objectives in the future. Carrying out the plan will require the cooperation and support of not only our employees but also many of our stakeholders, so we have announced Kao Group Mid-term Plan 2015 (K15) and will work to realize it.

The plan includes two concrete targets. The first is to break previous records for consolidated net sales and profits. With that in mind, the second target consists of achieving numerical targets for net sales, operating income and the overseas sales ratio. These targets are ¥1.4 trillion in net sales, ¥150.0 billion in operating income and an overseas sales ratio*6 of 30 percent or more. I do not believe these figures will be easy to reach, but we can accomplish this task through the combined efforts of the Kao Group.


*6 Ratio of net sales to foreign customers to consolidated net sales





Growth Strategies for Achieving K15

The three growth strategies for achieving K15 are "Expand the Consumer Products Business globally," "Further reinforce the Fabric and Home Care Business, and accelerate profitable growth in the Beauty Care and Human Health Care businesses" and "Reinforce the Chemical Business."

The global expansion of the Consumer Products Business will require an approach that focuses on the expanding middle-class consumer segment in growth markets. Further reinforcing the Fabric and Home Care Business will involve maintaining or capturing the top share in each product category, while the main points for accelerating profitable growth are strengthening the prestige cosmetics business in the Beauty Care Business and making new proposals focused on health and the aging society in the Human Health Care Business. In the Chemical Business, we will focus on developing environmentally conscious products and leveraging synergies with the Consumer Products Business.

In each case, these initiatives will be driven by aggressive investment, innovation and structural reform for transformation into a structure capable of generating greater profit while maintaining growth.



Drivers for Achieving K15

The Kao Group has been investing in the Consumer Products Business and the Chemical Business with a focus on China and Indonesia, and we plan to step up investment further in these areas. For Consumer Products, a new manufacturing facility in Hefei City, Anhui Province, China started production at the end of 2012. Moreover, in Indonesia, a country with a population of over 200 million and a large proportion of young people, we are building a second plant for business expansion in 2014 and beyond. Total investment will be approximately ¥10 billion, and operation is scheduled to commence at the end of 2013. As we launch this second plant, we will work toward substantially developing the volume zone business in Indonesia. I would like to make Indonesia another example of our success in the volume segment along with China. To strengthen production capacity in the Chemical Business, we have started building new plants in Indonesia and China and investing in the Philippines. We will also strengthen business tie-ups and engage in M&A where we deem it necessary.

As for innovation, I will give three specific examples.

First, Merries baby diapers have a solid hold as the brand with the top share in Japan as a result of continuous improvements to enhance their gentleness on skin, which is the core product concept. Exports from Japan to Russia and China are also selling favorably in the premium segment. Sales of Merries Shun Shuang Tou Qi baby diapers, which were launched in January 2013 targeting the growing middle-class consumer segment in China, are off to a good start.

Next is Healthya Coffee. This coffee drink offers the finest aroma and flavor, in addition to offering consumers the special benefit of all Healthya products, which is promoting the utilization of body fat as well as ingested fat. This feature is different from other drinks approved as food for specified health uses, which work to inhibit fat absorption. Expectations are high for this product and I am committed to making it a major success.

The third example is the new refill product for Attack powder laundry detergent. The fully functional packaging is easy for anyone to open by hand without spilling, even the elderly. Moreover, this packaging substantially reduces environmental impact. With this offering, we are not only leading the industry as a whole but also taking into consideration environmental concerns as we pursue a greater share of the powder laundry detergent market.

Innovation is essential to profitable growth of the Kao Group, and to building its corporate presence. We will devote the combined efforts of the Group toward realizing this goal. Please look forward to our results in this area.

In terms of structural reform, we have had great success to date with Kao Sofina, Kanebo Cosmetics and the Consumer Products Business in China. I want to expand these reforms throughout the Kao Group to transform into a structure capable of generating greater profit while maintaining growth. This is vital to the achievement of the K15 operating income target.



Sustainability

A basic principle of the Kao Group is to contribute to society by helping to resolve social issues through business activities.

Based on the Kao Way, its corporate philosophy, the Kao Group plans to work toward two objectives: sustained profitable growth with high-value-added products created by understanding the needs of the times and the regions it serves through Yoki-Monozukuri that uses Kao's technologies and know-how; and contributions to society by helping to resolve social issues and conducting social contribution activities through its business activities.

In addition to helping to resolve social issues through its business activities, the Kao Group fulfills its role as a "public entity of society" by paying taxes and providing employment. In addition, we will continue and reinforce our social contribution activities as a corporate citizen.

Amid significant changes in our operating environment, we are working to enhance corporate governance in terms of both strengthening the supervision of management and accelerating execution. To enhance management transparency and take into account diverse perspectives, Kao's Annual General Meeting of Shareholders resolved at a meeting held on March 26, 2013 to raise the number of outside members in the Board of Directors and the Audit & Supervisory Board by one each. Currently, there are six outside members in total in the two boards, accounting for 40 percent of all members.



Outlook

In 2013, the Kao Group is aiming for increases in net sales and operating income for the fourth consecutive fiscal year and record-high net income.

For 2013, the Kao Group forecasts net sales of ¥1,270.0 billion (adjusted growth of 4.1 percent based on a comparison with the twelve-month period from January 1 to December 31, 2012 for Kao Corporation and its subsidiaries whose fiscal year end was previously March 31), operating income of ¥116.0 billion (adjusted growth of 3.8 percent) and net income of ¥73.0 billion (adjusted growth of 37.5 percent). We are targeting increases in sales and operating income for the fourth consecutive fiscal year and net income exceeding our current record high of ¥72.2 billion set in fiscal 2004. In addition, we plan to continue raising annual cash dividends by ¥2.00 per share to ¥64.00 per share.

With the support of our stakeholders, the Kao Group plans to enhance its corporate value as it steadily works toward achieving K15 targets and its long-term vision. I hope you look forward with us to the challenges we are committed to as a Group and continue to offer us your support.

April 2013


President and Chief Executive Officer
Kao Corporation