Decrease of accounts in 2016 for Swatch Group

Numbers
In 2016, the Swatch Group reported net sales of 7.553 billion francs at current exchange rates down 10.6% (-10.8% at constant exchange rates). The Watches & Jewellery segment including Production generated net sales worth 7.305 billion, 10.7% lower at current exchange rates. The operating result for its part stood at 805 million, equivalent to an operating margin of 10.7% (down 44.5% compared to the previous financial year). The net profit reached 593 million giving a net margin of 7.9% (47% lower than in the previous financial year).

Strategy
The Swatch Group is maintaining an unchanged industrial strategy with a long-term focus, i.e. it intends to continue to strengthen Swiss production in every segment despite the very unfavourable exchange rate situation. Calculated at 2010 exchange rates, the Group has experienced a cumulative loss of earnings equivalent to sales worth 5 billion between 2011 and the end of 2016. Investments in innovation remain unchanged for both product development and production. Selective expansion of the proprietary distribution network continues.

Despite a difficult economic environment, the Swatch Group is pursuing its long-term strategy of maintaining employment opportunities. That policy enables it to respond rapidly and flexibly to demand which is growing again today.

Group overview
The past financial year was marked by worldwide turbulence in a very challenging economic environment. The decline in consumption, already evident since the end of 2015, intensified particularly in the first half of 2016. As in the previous year, the tragic terrorist attacks in France, Belgium, Germany and Turkey, as well as new legal regulations in various countries, led to rapid regional shifts. The slightly positive currency trend for the US Dollar, Japanese Yen and Euro was almost completely neutralized by the weakening of the British Pound as a result of the Brexit decision on 24 June and the devalued Chinese Renminbi. The Swiss Franc remains strongly overvalued, reason why the long-term strategy of favoring a defensive price adjustment policy over short-term profit thinking is maintained.

Highlights of the financial year 2016
In the Watches & Jewelry segment, including Production, net sales decreased 10.7% compared to the previous year at current exchange rates to CHF 7,305 million. The currency impact of 0.2% was slightly positive. The segment achieved an operating margin of 12.2% (previous year: 18.8%).

Compared to the first half year, operating margin improved by 2 percentage points in the second half. Sales performance in Europe presented a very mixed picture. Due to the terrorist attacks in France and Belgium, tourists were largely absent, which led to declining figures, the same was also partially the case in Germany and Switzerland with its ongoing high Swiss Franc. Sales in Italy and Spain were relatively stable. In general, Europe reported significantly lower tourist numbers, particularly from China, due to the new statutory entry requirements for biometric visas. Sanctions by Europe and the USA against Russia led also to a massive reduction in tourists from this region. The Brexit decision of 24 June however led to double-digit sales growth in local currency in Great Britain, but also to a lower margin, due to sales prices in the devalued British Pound and purchase prices in the expensive Swiss Franc.

South Korea practically offset the drop in sales in the previous year caused by MERS, thanks to double-digit growth. The situation in Hong Kong  normalized in recent months, not only in Retail, which in total stands at the previous year’s level, but also in Wholesale. In Mainland China, increased demand in recent months was very positive with growth of over 20%, it was even higher in the group’s own retail network. Also the markets in Indonesia and Malaysia performed well, and sales in Japan are as well on an upward trend in recent months.

Markets in the Middle East recorded double-digit growth. The Indian market remained stable, despite the chaotic situation caused by the exchange operation for banknotes. Business in North America was slightly below the previous year, while sales in Middle America performed positively. The sales share for the group’s own retail rose to approximately 30%, within the scope of the further retail expansion strategy with over 100 additional points of sale in the best locations.

Production integrated into the Watches & Jewelry segment recorded significantly lower capacity utilization than in the previous year. Many third-party brands reacted in panic to decreasing demand by massively reducing orders of watch movements and components. The group‘s own brands could not compensate for this decline. Unchanged fixed costs for unused production capacities resulted in a temporary decline in the operating result for this area. Cost optimization programs have always been a tradition at the Swatch Group, regardless of increasing or decreasing sales. The positive emerging performance signs in the markets will very quickly result in increased demand for watch movements and components in Production. Thanks  to the maintaining of production capacities, as well as a highly motivated workforce, we can immediately respond to this increased demand, which will also lead to an improved situation in this area in 2017.

The Electronic Systems segment generated net sales of CHF 260 million in 2016, 11.0% lower than the previous year, due to continuing price pressure on products. Despite this, the operating result could be increased to CHF 10 million (previous year: CHF 9 million). With the very strong innovation power in this segment, the market leader position in the area of integrated circuits with lowest energy consumption was expanded, and new sensors(pressure sensors) and applications (dual RFID with NFC and UHF technology) were developed. In December, EM Microelectronic-Marin was awarded the innovation prize Connect+Event in Paris for the best technological innovation in connected smart and mobile devices. Renata further expanded its position as market leader in the area of environmentally friendly batteries with highest energy density. Micro Crystal launched additional high-precision real time clock (RTC) modules, based on miniature quartz crystals and the smallest CMOS circuits, into the market. The new watch modules from Micro Crystal, an integration of quartz and circuits from EM Microelectronic-Marin, will make it possible to produce ETA quartz movements with a previously unequaled precision.

Personnel
The number of employees decreased by approximately 600 persons to 35,700 in 2016. This was solely due to normal fluctuations.

Training
The Swatch Group promotes vocational training at all levels, and in particular, for apprentices who wish to graduate as watchmakers or in related technical professions. Currently, more than 600 persons are again being trained in Switzerland and abroad, including students in the six Group’s own watchmaking schools in Miami, Kuala Lumpur, Shanghai, Hong Kong, Pforzheim and Manchester.

Operating result and net income
Low capacity utilization in Production with a practically unchanged workforce, as well as shifts in the country mix, impacted the operating result in 2016. Marketing investments were held at the same level, also due to the presence of Omega as official timekeeper at the Olympic Games in Rio de Janeiro. The operating result amounted to CHF 805 million (minus 44.5% compared to the previous year), equivalent to an operating margin of 10.7%. In November and December, the operating margin increased due to the positive sales performance. Net income closed at CHF 593 million, 47.0% lower than the previous year. This is equivalent to a net margin of 7.9% compared to 13.2% in the previous year. Benchmarked to the first half year, the operating margin improved from 9.5% to 11.8% and the net margin from 7.1% to 8.6% in the second half year.

Product highlights
Especially the antimagnetic Omega Co-Axial Globemaster collection (METAS certified), the launch of the Swatch NFC Bellamy as a contactless payment device in China, Switzerland and Brazil, as well as the new Swatch POP and Swatch Sistem51 Irony collections generated good sales. Also, the new Omega Seamaster Planet Ocean Deep Black became a bestseller. Rado was on the road to success with its new Ceramica and HyperChrome 1616 collections, as well as Longines with the Dolce Vita, Conquest Roland Garros and Longines Master Collection, and Tissot with the new T-Touch Expert Solar NBA (North American professional basketball league) model. Furthermore, Tissot successfully accompanied the Tour de France 2016. In the luxury segment, Harry Winston continued its very good growth path, with its high jewelry collection Lotus Cluster, Art Deco and Precious Butterfly.

Investments
Across all segments, the Swatch Group invested a total of CHF 563 million in non-current operating assets in 2016. In addition to the further broadening of its own retail network, heavy investment was also made in new production buildings (Omega, Swatch and Boncourt) and in state-of-the-art production and assembly facilities, with particular investment in the expansion of Industry 4.0. Significant investment was also made in the area of customer service, both in Switzerland and in the foreign distribution companies.

Outlook for 2017
Consumer interest and the potential for Swiss watches remain strong. Particularly Asia and the Middle East are showing again increasing sales in recent months, including brands in the luxury segment, so that healthy growth in local currency can again be expected for the year 2017, even more this expectation also applies to the USA and Europe.

With its global distribution network and the successful introduction of E-Commerce already in 2001, the group is in an excellent position to serve its customers, wherever they are in the world, at any time. Our very motivated employees in retail, in distribution, and over the entire production chain make this possible.

The number of patent applications in the year under review again exceeded 180 patents, in the areas of electronic smart and mobile device products,mechanical watches and watch movements, as well as in "habillage" and for innovative production methods (Industry 4.0).

In the Electronic Systems segment, the newest developments in the area of dual frequency RFID technology (NFC and UHF), an innovative Bluetooth module, integrated circuits with lowest energy consumption and the most innovative sensor technology (particularly pressure sensors), as well as the real time clock (RTC) module will ensure growth. In addition, Belenos will put its pilot production line for the new batteries into operation. Also, Swiss Timing will show up with many technological innovations in timekeeping for sporting events.

The year 2017 will be marked by many new product launches by our brands. The 60^th anniversary of the Omega Speedmaster will provide a strong stimulus. The creative and very successful use of Omega’s E-Commerce, with Speedy Tuesday on Instagram, demonstrates the great potential and enormous demand. Swatch will launch the unique new very slim Skin collection, as well as the second generation of the Swatch Bellamy as a contactless payment device. This is just to name a few examples.

Based on the positive sales figures in all segments in recent months, including January, Swatch Group anticipates healthy growth in 2017.

February 16, 2017