Seiko Group Corporation

FY22 Q4 Consolidated Results Presentation - Q&A◆

Date：Wednesday, May 10, 10:30-11:30, Tokyo, Japan◆Location：Keidanren Hall (hybrid style – virtual + real)◆Respondents：Shinji Hattori, Chairman & Group CEO & Group CCO
Shuji Takahashi, President
Akio Naito, Director, Senior Executive Vice President
Jun Sekine, Director, Senior Executive Vice President
Shimesu Takizawa, Director, Executive Vice President

Summary of Q&A
Q1. Consolidated gross profit (GP) began to improve in the 1Q but remained unchanged yearon-year in the 4Q. Including the results of the Watches Business, what factors contributed
to this outcome? You set a target of one percentage point improvement in GP margin forthis fiscal year. How do you expect to achieve that in each business segment?
A1. In the 4Q, GP was stagnant due to production adjustments in both the Devices Solutions
Business (DS) and the Watches Business. If we consider only at the Watches Business,
the GP margin for the 4Q was unchanged from the previous year.
We aim to improve the GP margin by one percentage point again this fiscal year. However,
we will not achieve that by increasing the ratio of our high-margin, retail-oriented Watches
Business and WAKO Business, but rather, by steadily improving the GP margin of the DS
Business, Emotional Value Solutions Business (EVS), and Systems Solutions Business(SS) by one percentage point each.
Q2. It seems that advertising expenses in the 4Q were above the pre-COVID level. Was that
because of the delayed posting of expenses for the watch trade show (Watches &Wonders Geneva 2023) or something similar, or because you began to accelerate
investment in advertising in the 4Q?
A2. Until the 3Q, we projected increasing advertising expenses by approximately 10% from theprevious year. However, that figure rose by 15% in the 4Q. This was due mainly tosignificant expenses (millions of dollars) related to the WWG trade show. It does not meanthat we are accelerating our investment in advertising.

Q3. You forecast net sales in the EVS domain for this fiscal year to increase 2.5% year-onyear. Although sales of watch movements and sales in the mass-market price range are1

slightly weak, it seems reasonable to expect that the price increase in GS and the strong
performance in North America would offset that weakness. Why are you being soconservative in your estimates?
A3. Indeed, watch movements remain in a slump in this fiscal year. However, we are executing
a major business model transformation in China, where we struggled last fiscal year. Thisis a strategic shift from selling mid-price-range products online to selling higher-value
products at brick-and-mortar stores to increase our brand value. Because this strategy willtake some time to produce tangible results, we are taking a cautious view of our Chinese
business this year.
We believe that demand from Japan-bound tourists will gradually turn into a significant
positive factor. Unlike products in the mass-market range, GS is gaining popularity
overseas, and an increasing number of visitors to Japan now purchase GS products here.
To some extent, this demand from Japan-bound tourists may be cannibalizing local sales
in other Asian countries.
Our restrained forecast was based on continuing strong results in the high price range
being offset by ongoing sluggishness in mass-market sales, watch movements, and theChinese market.

Q4. You mentioned rising demand from inbound tourists helping to underpin sales in theWatches Business. What is your forecast for the impact of these tourists in the current
fiscal year?
A4. Chinese tourists are just starting to return to Japan, so their demand has not yet produced
a serious impact. While we do not expect sales to Chinese tourists to return to their peaklevel, they may account for as much as 10% of domestic sales, which would be significant.

Q5. When do you expect the production adjustment of watch movements and DS to end?
A5. With regard to watch movements, demand for analog quartz movements in the massmarket price range has been declining. We completed a production adjustment in the last
fiscal year to respond to that trend. However, if market conditions continue to worsen, wewill have to consider another adjustment this year, although we have no plan to do so at
this time.
Turning to DS, we already completed a production adjustment of crystals and otherproducts, and will now raise production levels while keeping a careful eye on market
demand. For hard disk drive components, we will need to continue adjusting production,
as we did in the last fiscal year.

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Q6. Do you expect the DS production adjustment in the first half of this year to depress
operating profit, and will that improve in the second half?
A6. Yes on both counts. We expect DS operating profit in the first half of this fiscal year will bemuch lower than in the previous fiscal year, but it should begin to recover together with themarket recovery in the second half.
Q7. Is the increasing price of GS in the second-hand market one of the reasons why overseas
customers come to Japan to purchase GS?
A7. No, we do not believe that tourists are coming to Japan to buy Grand Seiko because of therising price of pre-owned products. In the first place, there are very few good quality, preowned GS products available in the secondary market. And more than that, Grand Seiko'srecent increasing popularity overseas is not based on our older models (the kind that mightend up in the secondary market). Rather, Grand Seiko’s appeal has been growing intandem with a growing interest in Japan and Japanese culture, and also thanks to ourmarketing strategy, which focuses on the Nature of Time. This strategy differentiates GS
from the European luxury brands by highlighting Grand Seiko’s uniquely Japanese senseof aesthetics and the legacy of Japanese hand-made craftsmanship, which is even moreevident in recently released models.
Of course, the fact that GS won awards at the Geneva Watchmaking Grand Prix for two
consecutive years has been a big plus, as were our efforts to expand digitalcommunications during the pandemic years. We worked hard to show global markets what
the Grand Seiko brand philosophy is all about and to display our newest designs, whichwere inspired by the beautiful scenery of the Japanese countryside where GS is made.
Q8. What is your current-term outlook for the Watches Business in the North American market?
A8. We are taking a cautious view of future demand due to inflation. Over the past few years,
we have been establishing a high-end distribution system for GS and for global brands
priced above US$1,000. We do not believe that the weakening of macro demand will havea significant negative impact on this market segment. However, we do expect demand toslow somewhat compared to the past two years.
Q9. Could you explain your business model transformation in China and also give us an idea ofyour timetable for that shift?
A9. In the Watches Business, our business model in the Chinese market used to focus onmass selling using local influencers to advertise our products, both on the Internet and via
other media. This strategy has changed due to “common prosperity” policies in the PRC,
and more recently, to the zero-COVID policy, which caused us to struggle in the last fiscal3year.
It is clear that GS has a lot more room to grow in the Chinese market, so we are creating
new distribution channels for high-end products. To transform our business model, weneed to strengthen the GS team, adding people who are skilled in things like distribution
and high-end product marketing. As to timing, we aim to build a strong foundation for thisbusiness during the current fiscal year and begin an aggressive campaign in the followingyear.

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