Seiko Holdings Corporation
FY2019 3rd Quarter Consolidated Results Presentation
Summary of Q&A

Date:

Friday, February 14th, 2020, from 3:00-4:00 p.m.

Place:Seiko Holdings Corporation, Head Office

Summary of Q&A :Q1. How much did the consolidated results fall below the internal plan in the 3rdquarter?
A1. The downside amount in the 3rd quarter is roughly the same as thedownward revision of the financial forecast. The downward revision wasmade because we judged that it would be difficult to recover the 3rd quarter
downside in the 4th quarter.
Q2. In the Watches Business for the 3rd quarter, low- and mid-priced market
conditions were structurally severe, as sales to mass retailers worsened inJapan due to a reaction that was more serious than a surge in demand
before the consumption-tax hike. Should we assume that these conditions
will continue in the 4th quarter and into the next fiscal year?
A2. In addition to the effect of the consumption-tax hike, even mid-priced
products that are close to the affordable-priced product range are also facinga harsh environment. As a countermeasure, we are working to raise theaverage price of mid-priced products, mainly focusing on Global Brands. We
think that the severe market sentiment in the affordable-priced market willremain unchanged. However, more time will be necessary to ascertain
whether or not to position this as a risk from the next fiscal year onwards, as
our efforts are expected to have an effect. Among affordable-priced products,
we consider some aspects of these conditions to depend on merchandisingand marketing, such as releasing products with a solid concept, as seen in
Seiko 5 Sports, which was relaunched in August 2019 and has been
performing very strongly. However, fundamentally, we feel that thosemarkets below the mid-priced market are set to be weak.

1Q3. In the Watches Business, operating profit for the 3rd quarter (three months)
decreased by approximately 2.3 billion yen year on year, excluding an
improvement of more than 0.2 billion yen due to a change in the allocation
method of expenses related to headquarters for some subsidiaries.
Quantitatively, what are the main factors for this decrease?
A3. In the 3rd quarter, selling, general and administrative expenses increased byapproximately 0.5 billion yen year on year. The main factor responsible forthis was an increase in advertising and promotion expenses. Meanwhile, net
sales did not reach the approximate 3.7 billion yen of the same period of theprevious fiscal year. When this decrease in revenue is multiplied by theconsolidated gross margin of 40%, it corresponds to an approximately 1.5
billion yen downward impact on gross profit. When adding the increased
selling, general and administrative expenses of approximately 0.5 billion yen,the impact on operating profit is approximately 2.0 billion yen. While someother factors are also present, such as a slight difference between the grossprofit margin of the Watches Business and the overall gross profit margin,
which do not quite add up to match the 2.3 billion yen, this does not meanthat other factors that worsen profit are occurring. While the products wehave focused on sold well, and production efficiency improved from the firsthalf of the fiscal year, the monetary impact was limited in the 3rd quarter, asnet sales did not pick up. In addition, in a sluggish market in Japan, sales ofGlobal Brands increased year on year, and profitability continued to improve
due to an enhanced product mix. While there is no change in the fact that
production efficiency is improving due to an increase in mechanical watches,the year-on-year improvement is becoming less noticeable.
Q4. The impact from the novel coronavirus is not included in the revised financial
forecast. Can you please comment on the associated impact on sales,
manufacturing, and supply chains, to the extent possible?
A4. We are currently examining the amount of impact, and the situation ischanging constantly.
Regarding the extent of the impact, in the Watches Business, firstly, sales ofwatches are expected to decline in the Chinese market. However, because
the sales volume in China for our Company is modest in scale, the impact of
this decrease will also be modest. The sales company for watches inShanghai was able to resume operations on February 10. We believe that if
shipments of those products that could not be shipped up to February 102

proceed smoothly, sales can be recovered to some degree. Regarding theChinese domestic market business, logistics are also struggling, and thisimpact needs to be considered, as well. In B to C, and in particular in theWatches Business, it is possible that Japanese domestic demand will
weaken due to the impact from a reduction in tourists to Japan, andJapanese people also avoiding crowds and refraining from going out. Inaddition, we believe that similar phenomena may occur in Asian markets
with many Chinese tourists. At the moment, it is very difficult to determine
how long this situation will last.
With regard to B to B business and manufacturing, the Company owns
several locations in China, each of which was essentially closed until
February 10. Although these locations resumed operations from February 10,
not all employees are necessarily able to go to work. For instance,
employees are required to wait at home for two weeks, if returning from theirhome town in another province. Currently, the situation is that we have notyet reached full operations.
In addition, we are also collecting information from our suppliers. As of yet,no location has become unable to operate due to a lack of parts. Currently,
we are carrying out production activities using in-stock inventories, while
continuing to collect information.
Q5. Affordable-priced products have faced severe conditions in the Japanesewatch business. How did Global Brands perform?
A5. Due to a surge in demand in September, sales of Grand Seiko (GS) andother Global Brands were depressed in October, as expected. Although therecovery seemed to be slightly weak in November as well, Global Brands,
and in particular GS, recovered in December. Usually, sales begin toincrease significantly from the second half of November, toward theChristmas shopping season. The current fiscal year, despite sluggish growthin November, Global Brands, centered on GS, began to recover going intoDecember.
Q6. Regarding sales of Global Brands in Japan, although they did not deviate
largely from the forecasts, was growth slightly weak and not as expected?
What was the situation for Global Brands in each region in the overseas
market?

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A6. Overseas, Global Brands centered on GS grew the most in the U.S.
Because we restricted the supply of affordable-priced products, overallgrowth in the U.S. was modest. However, Global Brands performed
favorably, beyond our expectations each month in the 3rd quarter. In Europe,sales of Grand Seiko were in addition to existing sales. On a local currency
basis, net sales at local subsidiaries in the Netherlands, France, andGermany increased year on year. Only in the U.K., the affordable-priced
market was severe, and year-on-year sales were negative. However, even inthe U.K., both mid- and high-priced products grew. Net sales of Seiko brands,including GS grew year on year at many other local subsidiaries. In China inparticular, sales in the 3rd quarter grew significantly, mainly on Singles’ Dayin November.
Q7. What is the position of Grand Seiko and other Global Brands, in comparison
to competitors?
A7. Overseas, it varies from country to country. In the U.S., Grand Seiko entered
the top ten ranked brands two years ago, in a watch brand research study
conducted by a third party. In the first half of the current fiscal year, theranking rose further to become fifth. This is the situation in the U.S., which isour most favorable market. While other countries have not yet attained thislevel, each is progressing smoothly.
Q8. Regarding quartz movements in the watch movements business, what is thecurrent status and future outlook for the market, and the operational status ofproduction lines?
A8. When comparing the three types of what we call added-value watch
movements, standard movements of analogue quartz, and mechanicalmovements, standard movements of analogue quartz were the weakest.
While mechanical movements progressed at a faster pace than in theprevious fiscal year, analogue quartz fell year on year, and standard
movements also performed poorly. One factor is believed to be a cessationof growth in the Indian market, which at one time was experiencing growth.
In India, we have heard that domestic personal consumption is slightly down
due to unusual weather. Although we believe that continued growth ispossible in some markets, going forward, the markets in which we can groware limited, and expansion will be difficult, overall. In addition, we believethat the current downward trend will continue.
4Q9. Was the reason for the downward revision of the financial forecast in theWatches Business: sluggish growth in mid- and high-priced products or adecline in sales of products below affordable-priced products?
A9. The revision was fundamentally a revision of the portion of the plan that was
not achieved in the 3rd quarter. While mid- and high-priced products,
including Global Brands did not grow as expected, we think that, on balance,
the decline in affordable-priced products was a larger factor.
Q10. With regard to affordable-priced watches, if we consider that there was nosubstantial reaction, given the absence of a surge in demand before theconsumption-tax hike, it seems that the poor conditions in theaffordable-priced market represented a significant factor in the worseningof affordable-priced watches in the 3rd quarter. Because high-priced
watches performed steadily, although not as well as expected, is it fair toassume that results can be expected if you take measures that focus on
mid- and high-priced watches in the 4th quarter?
A10. There is no change in the Company’s policy of strengthening mid- andhigh-priced products centered on Global Brands, and we do not consider
this policy to be out of place, when looking at the current situation. We aim
to achieve the announced 4th quarter targets, based on this policy. While itis possible that our expected activities may deviate slightly from thisfinancial forecast, in part due to the impact from the novel coronavirus, wewill continue with this policy, going forward.
Q11. Are promotions to increase revenue and profit in the 4th quarter focused onJapan, on a regional basis?
A11. Promotions will be implemented mainly in growing regions such as the U.S.
and China, as well as in Europe, and will not be limited to Japan. However,expectations for the Japanese market, which has a larger proportion of net
sales, remain high.
Q12. Advertising and promotion expenses increased by 15% in the 3rd quarter,
on a cumulative basis. What are the details of such expenses? Are there
any items that are unique to the current fiscal year? On a regional basis,
where are expenses increasing?
A12. There are no unique items. One factor for this increase is investment
depreciation and the activity costs necessary to establish additional
5locations, such as Seiko Dream Square. On a regional basis, we areincreasing expenses overseas, such as in the U.S., where sales aregrowing. In addition, we are also increasing the distribution of digitalmarketing. However, advertising expenses in the 3rd quarter (threemonths) did not increase significantly, year on year.
Q13. How are you planning to spend sales promotion expenses for the current
fiscal year and the next fiscal year (FY2020)?
A13. We expect advertising and promotion expenses for FY2020, which is thesecond year of the Mid-Term Management Plan, to increase relative to thecurrent fiscal year, as planned, in order to achieve the final year of theMid-Term Management Plan targets.
Q14. You have announced the integration of the watches businesses of Seiko
Watch Corporation (SWC) and Seiko Instruments Inc.(SII) Can you please
explain the objective once again? In addition, what are the possible
impacts of this integration on the results for the next fiscal year (FY2020)?
A14. We announced that we will transfer mainly the manufacturing subsidiariesof the watches business of the SII Group to SWC (making themsubsidiaries of SWC) on April 1, 2020. On April 1, 2019, we alreadytransferred the design and development units of SII’s watches business toSWC, which have now been operating for ten months. As the next step, weaim to transfer the manufacturing department, and have production andsales of our Group’s watches businesses act within the samedecision-making boundaries, in order to make various processes move
more smoothly and speedily. April 2019 was the first step in this process,and the newly-announced integration represents the second step.
The effects that are expected in the next fiscal year involve speedy
decision-making with respect to investments, products, and development,
which will not immediately have a significant effect on businessperformance.
Q15. As the affordable-priced market is contracting in North America, going
forward, what sales composition ratio are you aiming for between mid- andhigh-priced products, mainly Global Brands, and affordable-priced productsin the U.S.? In addition, how much progress is being made with respect tothat goal?
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A15. In the U.S., while holding back on launching new affordable-priced products,
we are working to expand mid- and high-priced products. In April of thecurrent fiscal year, we ceased handling Pulsar watches, which are in a
price range below that of Seiko. Meanwhile, having established Grand
Seiko Corporation of America in October of the previous fiscal year, we arestrengthening Global Brands, centered on Grand Seiko. However, webelieve it will take from three to five years to obtain the expected results.
While progress has exceeded our expectations, it has been just over a year,
the current fiscal year. Please consider our progress against the target
within that range.
Q16. In the Electronic Devices Business, operating profit has continued on adownward trend. In the 7th Mid-Term Management Plan, this wasunderstood to be a field that was initially going to grow significantly. Can
you please explain, to the extent possible, what recovery measures you areplanning for the next fiscal year?
A16. With regard to the Electronic Devices Business, despite net sales ofroughly 50.0 billion yen, the Business consists of many product groups, inwhich no single product accounts for a significantly large portion. Under
such circumstances, by growing each product, we think that, conversely, it
will not be the case that when a product performs poorly, it will be unable torecover without some form of recovery measures. The businesses thathave not progressed as expected recently are automobile components andhard disk-related products, both of which are precision components. These
are gradually recovering, and we think that we can make capital
investments to increase production from the next fiscal year. In addition,quartz crystal and silver oxide batteries have performed relatively favorablythe current fiscal year. Thermal printers are a business in which demand isrising in various parts of the world, and ensuring a supply of new products
is an important point, which is progressing well. Market recovery for inkjet
print heads in Europe has been slightly delayed, and it is difficult to clearly
project a forecast for this business, primarily due to market conditions.
Other than this, we feel that we are seeing signs of a relative recovery.

Q17. In the Wako Business, the current situation may be severe due to adecrease in demand from tourists to Japan toward the next fiscal year.
7Under such a severe external environment, what measures will be taken to
secure sales for the next fiscal year? Can you explain the current situationand the direction to follow?
A17. As of December, both overall net sales and profit in Others increased year
on year, largely due to a surge in demand for Wako. While it has performed
relatively favorably in the current fiscal year, the demand from tourists toJapan has recently seen a sudden drop, and measures will also be needed.
However, these circumstances are due to the novel coronavirus, measures
for which will change depending on when the virus abates. Basically, themajority of Wako customers are from Japan, and many have been with
Wako for a very long time. We believe that it is most important to value theconnections with our customers and firmly maintain Wako’s superior
hospitality cultivated through a long history of tradition.
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