Swatch Group Half-Year Report 2014

Coming from Biel / Bienne in Switzerland  I today received the Swatch Group Half-Year Report 2014. What we see is continued growth despite significant negative currency impact. All I can state here is: Chapeau!

Please find herewith the todays issued statement of the Swatch Group:

In brief:

The Group’s gross sales were up 8.5% to CHF 4 535 million at constant exchange rates, or 4.0% to CHF 4 347 million at current rates.

Gross sales grew over 10% in the Watches & Jewelry segment at constant exchange rates, including Production 8.8%, despite the fire at ETA which negatively impacted sales by approximately CHF 200 million.

More than 800 new jobs were created in the first six months of the year, of which over 460 in Switzerland.

As expected, operating profit of CHF 830 million was 8.8% lower than the previous year due to the negative currency situation, the high level of marketing expenses for the Olympic Games in Sotchi and the fire at ETA; nevertheless, operating margin reached 20.2%.

Net income was CHF 680 million, 11.5% below the first half of 2013, with a 16.6% return on net sales.

Positive outlook for the second half of the year, with a better comparison basis for exchange rates and an already improved situation at ETA as of July, after recovery from the fire.

In detail:

Group overview

Swatch Group generated gross sales of CHF 4 535 million at constant exchange rates in the first half year of 2014 and thereby grew by a further 8.5%. The already overvalued Swiss franc strengthened further against currencies in all of the Group’s important sales regions compared to the first half of the previous year. The extremely adverse exchange rate situation negatively impacted Group sales by CHF 188 million or 4.5 percentage points.

In the Watches & Jewelry segment (including production), Swatch Group recorded gross sales growth of 8.8% at constant rates and 4.3% at current rates compared to the previous year. This growth was generated by the Group’s strong brands and broad distribution network. In local currency, all markets except for a small number of European countries remain on a growth course compared to the very high prior-year figures. This is also the case in China. In addition, all brands continued to invest heavily in marketing, particularly Omega during the Olympic Winter Games in Sotchi.

Harry Winston made further significant investments in a wider product range and an increased availability of «high jewelry», as well as in the new watch collection which was presented at Baselworld 2014 and which will be available in its retail stores in the second half of 2014. The brand also invested in renovation of its retail stores.

The fire at ETA on 29 December 2013 caused a significant strain on Group production. Although the fire was quickly brought under control, extensive damage and an interruption of business occurred in the electroplating department and the downstream watch movement production. ETA completed cleanup in January 2014, however, due to the long delivery schedules for replacement installations, the burned out electroplating department could not be rebuilt as foreseen in the first half of 2014. Non-deliveries and delivery delays resulting from the fire negatively impacted gross sales by approximately CHF 200 million. In the meantime, production at ETA has been reorganized so that only minor delays in watch movement production are anticipated in the second half of 2014.

The Electronic Systems segment continued to remain exposed to the overvalued Swiss franc, particularly against the USD and JPY, which eroded further compared to the first half 2013 by –5% and –11%, respectively. This segment generated gross sales of CHF 146 million or a decline of 2.0% at current exchange rates, although a return to very positive sales development was reported in the months of May and June.

Despite unfavorable exchange rates and the strain on watch movement production caused by the fire at ETA, the Group continues to follow its long-term defensive pricing policy, which prioritizes market gain over short-term profitability. Under these circumstances, Swatch Group generated an operating profit of CHF 830 million and a net income of CHF 680 million. 800 jobs were also created worldwide since the end of 2013, of which 460 in Switzerland. In total, Swatch Group employed over 34 000 at the end of June 2014. In addition, CHF 396 million was invested in operating assets. The operating cash flow for the first half year 2014 amounted to a total of CHF 1 013 million.

Inventories amounted to CHF 5 729 million at the end of June 2014. The increase of approximately CHF 300 million compared to the end of 2013 can be attributed for the most part to semi-finished and finished products. Over CHF 140 million was invested in the new diamond-studded «high jewelry» collection for the above-mentioned expansion of the Harry Winston brand. The opening of new retail stores, the upcoming launch of the new Omega Master Co-Axial with antimagnetic movement and the worldwide launch of the Swatch Sistem51 in the second half of the year are additional elements contributing to the positive increase in inventory.

Outlook

The outlook for the Group in all regions and segments remains very good and a promising second half of 2014 is expected. Particularly in the USA and Japan, sales continue their very positive development. Also, the stronger sales trend noticed on the Chinese mainland continues. In contrast, the situation in Hong Kong is affected by a number of uncertainties. In the second half of 2014, due to the anticipated lower comparison basis of exchange rates to the Swiss franc, negative currency impact should be less dramatic than in the first half of 2014.

The Group will strengthen its worldwide market presence through investment in marketing, retail and customer service. In addition, ongoing investment will be made in the continuing training of personnel and the professional education. In the second half of 2014, the brands will broaden the existing and sought-after product line with the launch of new products.

The Swatch brand expects robust growth in the second half of the year from the increased availability of the very successful and sought-after Sistem51, and the Omega Master Co-Axial will be a strong catalyst on the sales front. The progress of the Harry Winston brand, acquired last year, has been highly encouraging and with the launch of the new watch collection, it will continue to make a major contribution to the development of the Group during the next six months.

In the production sector, particularly the manufacture of Universo watch hands and production of Rubattel & Weyermann watch dials, the new and modern production facility in La Chaux-de-Fonds will start its operations in August. Delivery delays of watch movements resulting from the fire at ETA will be increasingly resolved.

Swatch Group will continue to consistently follow its long-term strategy to gain market share.

This is a personal remark: Mr. Hayek, Chapeau to you and all your employees!