Seiko Holdings Corporation
FY2020 Q2 Consolidated Results Presentation
Summary of Q&A

Date:

Wednesday, November 11, 2020, from 3:00-4:00 p.m.

Place:<Web conference>Respondent:

Yoshinobu Nakamura, President
Shimesu Takizawa, Executive Director and CFO
Itsuko Akashi, General Manager, Finance & Corporate
Strategy Planning Department

Summary of Q&A :Q1. Is the decrease in SG & A expenses for 1H20 due to a decrease in activity
to date, or is it a reduction that will remain in 2H20? In 2H20, you expect
the operating profit margin to be roughly the same as 2H19 despitesluggish sales growth. Are there any other factors?
A1. The reduction related to SG & A expenses was greater in the 1Q20 than
2Q20. Excluding the amount transferred to extraordinary losses, thereduction was actually less than 4.0 billion yen. In 2Q20, the reduction was
down to 1.4 billion yen due to increased activity. In 2H20, overseas
business trips will continue to be difficult and sports events will becancelled, resulting in a reduction in promotional investments compared to2H19. Meanwhile, we believe that the reduction will not be the same as
before, because we will be increasing our digital marketing activities.
As for other areas of improvement, we have factored in improved
profitability in line with relatively steady sales of in-house mechanicalwatches.

Q2. What is your approach to advertising expenses for 2H20 and for FY21?
While advertising expenses were restrained in 1H20, activities areexpected to increase in 2H20. What kind of changes do you expect to see
year on year? As you shift to digital marketing, are your marketing efforts
becoming more efficient?
A2. Currently, advertising activities have not returned to normal across all
markets. Our policy is to hold back investment in areas where the market
recovery is slow and inefficient. Thus, we do not think the amount ofadvertising expenses will reach the level of FY19. In addition to productadvertising, sports events in which we were planning to support
timekeeping have been cancelled, causing slower growth in expenses.
In terms of efficiency, we think that digital marketing is more efficient. We1

believe that by creating a variety of information in so called “targetmarketing,” we should be able to conduct marketing activities at points
closer to potential watch purchasers. For the Company, we cannot say that
we are seeing results in terms of efficiency yet, but we are working on it.

Q3. In terms of capital investment, what kind of real estate investment occurredin 2Q20, and what kind of capital investment do you think is necessary forthe post-coronavirus era in order to expand sales of Global Brands (GB) in
the Watches Business going forward?
A3. The real estate acquisition that occurred in 2Q20 concerned land and abuilding in Ginza, valued at approximately 6.0 billion yen, which is adjacent
to a property leased to the Company as well as real estate owned by theCompany.
As for future capital investment, the Company will need to undertake
capital investment not only for assembly but also for parts and components
for the production of high-end products. We believe there is enough room
for investment not only in high-end products but also in affordable-priced
mechanical watches.

Q4. In terms of inventories, you estimated that you would proceed withinventory adjustments of watch movements during 2Q20. How did thisproceed in practice? In addition, the Watches Business seems to haveshown a steady recovery in profits compared to the recovery in sales from
1Q20 to 2Q20. Were you able to improve profits after making inventory
adjustments?
A4. Inventories of watch movements were a factor for deteriorating profit due tolower production during 2Q20. However, the impact was reduced bytransferring fixed costs to the manufacturing of other products. The
production of analogue quartz (AQ) movements will need to be reduced in
2H20 as well. In particular, standard AQ movements still need to beadjusted. However, inventories of some products, such as added-value AQ
movements, have been reduced to a level where they are insufficient. If
anything, we are at the point where we need to increase the production ofmechanical movements, including those in the affordable and higher priceranges. It is necessary to make purchase adjustments in order to reduceinventories of completed watches. We will also make adjustments not onlyfor FY20 but also for FY21, in order to optimize inventories of completedwatches, rather than taking short-term measures.

Q5. What was the reason for the deterioration in income from investment inaffiliates compared to 1H19?
2

A5. Income from investment in affiliates turned to a loss. However, sales ofshares in ABLIC Inc., which marked a gain in 1H19, broke even, avoiding aloss. Of the entities accounted for using equity method, OHARA INC.,
which is a listed company, is experiencing a decline in performance. If you
do the calculation based on OHARA INC.’s already disclosed 1H20financial results and the Company’s equity in OHARA INC., you canestimate income from investment in affiliates turning to a loss.

Q6. You announced a dividend forecast of 25 yen per share for FY20. Can you
please explain again your approach to dividends?
A6. The Company has paid stable dividends in the past. FY20 experienced
unusual conditions, and the Company’s forecast for the full-year final profit
is 1.0 billion yen. If you assume that 1.0 billion yen is returned entirely toshareholders, the annual dividend would be 25 yen per share. Afterrepeated deliberations by management, we decided to put all of our profits
into dividends. We will continue to aim to pay stable dividends rather thanusing the dividend payout ratio as an indicator.

<Watches Business>
Q7. I get the impression that watch sales in 2Q20 (July to September) arerecovering, mainly in overseas markets. You explain that GB are
performing favorably, with a particular focus in the U.S. and other countries.
Can you tell me about the background to this and the outlook for 2H20?
A7. Sales have recovered in 2Q20 in many overseas countries and regions, ledby GB, mainly Grand Seiko (GS) and Seiko Prospex (Prospex). The
distinctive background to this is that, in comparison to the Japanese market,
we have been engaged in digital marketing for the past few years overseas
in relation to GS and others. We believe that the demand from our target
users for digital marketing activities was relatively easy to capture as wellas to recover, even during the coronavirus situation. Meanwhile, due to thelarger scale of the domestic market, we have a wide range of users andvarious distribution channels. Thus, it will take time for sales in Japan as awhole to recover.

Q8. The novel coronavirus started spreading again in Europe from thebeginning of November. Will the momentum be maintained?
A8. In terms of the outlook for 2H20, we are keeping a close eye on whether
the recent European lockdowns since the beginning of November will belifted by December. If they end in November, I think we can look forward to3

Christmas sales in December, including a rebound from lockdowns.
However, when considering the repeat orders we are expecting in 4Q20, Ithink we will have to slow down from the speed we were hoping for.
Policies that are compatible with economic activities are expected not onlyin Europe but also in the U.S. and Japan.

Q9. Regarding the strategy for the Watches Business, I recognize that you
have been communicating the benefits of GS and other watches throughdirect sales Boutiques and appealing events. I got the impression that thishas changed along with the shift to digital marketing. Going forward, will
there be any changes in your strategy in terms of closing Boutiques andspending on events?
A9. The novel coronavirus has changed the way we sell, but we are notplanning to close Boutiques. We consider the presence of Boutiques to beimportant, as we deal with high-end watches. At the same time, we willcontinue to strengthen our digital strategy, as an online channel isunavoidable.

Q10. In the Watches Business, how were sales of watches other than GB in
1H20? Going forward, do you plan to make any strategic changes to yourproduct portfolio, such as reducing non-GB watches?
A10. Net sales of GB in Japan as a percentage of total sales did not increasethat much for 1H20. Sales of both GB and non-GB watches saw almost
the same pattern. In Japan, GS has not recovered, mainly due to sluggish
growth in consumption among senior customers. However, there arestrengths and weaknesses even within GB, such as strong performanceof Prospex. Meanwhile, the GB ratio is growing overseas. As a result ofour focus on digital marketing, GB, which had potential to grow, hasgrown. Given the fact that overseas sales have not reached the level of
1H19 overall, it can be said that the growth of watches other than GB issluggish.
However, I think it is not necessarily true that we will be downsizing
non-GB watches more than we have been doing until now as a productstrategy. We have to develop product strategies based on new sales
methods and consumption trends, and we do not just decide on strategies
based on the categories of GB and others.

Q11. How were net sales in China in 2Q20? If sales were strong, what are thereasons for such performance?
A11. The growth of net sales for 2Q20 in China was in high double digits.
4Consumption in China is booming. The aggressive promotion ofe-commerce sales since FY19, such as by incorporating digital marketingand other measures, led to these results. Furthermore, GS has been
growing well in physical stores. While the e-commerce ratio has remained
high, GS has been able to grow in both e-commerce and physical store
distribution channels, and not just one or the other. We believe that thegrowth of GS in the U.S. has had a positive impact on the Chinese market,
as it has been highly regarded on SNS.

<Systems Solutions Business>
Q12. The size of the Japanese market for time stamps in the Systems
Solutions Business is not large, but I hear that the Company has a 60%
share. How do you see its potential as a current business?
A12. The market is growing, not only for time stamps, but also for digital
contracts and others, and we want to be proactive in this area. The
market is expected to grow rapidly in the future as the government’s
intentions come into play, so we want to take advantage of thisopportunity to expand.

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