Record results for Swatch Group

The very sharp acceleration in the last quarter of 2017 continued in the first half of 2018. The Swatch Group, with its strong brands and its own retail network, including e-commerce, and its efficient customer service, generated record sales of 4,266 million francs (+14.7% at current and +12.6% at constant exchange rates) in the first semester. The Swatch Group continues to maintain its consumer-friendly and defensive pricing policy and does not automatically adjust local sales prices to volatile exchange rates versus the overvalued Swiss Franc.

Strategy
The very strong performance in the first half year of 2018 once again confirms the validity of the Swatch Group strategy: to keep its personnel employed and maintain its production capacities in order to be prepared for the upswing; to make long-term investments in product innovation and marketing; and to regard inventories as an absolute prerequisite for growth and market share gains.

Development in the segments and countries
Impressive acceleration in both sales and quantities sold was reported across the board by all brands and in all price segments, not only in the prestige and luxury segment, but also in the middle and basic price segment. This led to a strong increase in production in the Watches & Jewelry, including Production segment, where capacity limits have already been reached once again in several areas.

All regions contributed to the best first semester sales in the history of the Group, led by Asia with very high growth rates, both in wholesale and in its own retail, including e-commerce. In North America, a double-digit sales increase was also recorded. In its home market, Switzerland, the Group recorded a comparable strong increase in sales. Europe displayed growth as well, although very different depending on the region.

Net sales in the Electronic Systems segment increased slightly by 2.3% to 136 million francs. This segment continues to be characterized by its outstanding innovation, which played a crucial role in this area achieving a positive operating result despite eroding prices in US dollars.

Marketing
In the first half of 2018, in addition to the normal marketing activities, massive investment was made in two extraordinary events, the 23^rd Olympic Winter Games in PyeongChang, South Korea, by Omega, and the Commonwealth Games in Australia by Longines.

Personnel
Due to healthy growth and the introduction of many new products, the Group hired more than 800 new employees, the majority in the Swiss production companies. Therefore, the workforce increased to 36,200 employees in comparison to 35,400 employees at the end of December and 35,000 at the end of June 2017.

Training
The Swatch Group promotes vocational education at all levels. At the end of June 2018, approximately 200 persons successfully completed their vocational training, of which 150 in Switzerland. In all, more than 700 persons in Switzerland and abroad are in training during the course of the year, either as apprentices learning the watchmaker and related technical trades, or as students in the Group’s six international customer service watchmaker schools in Miami, Kuala Lumpur, Shanghai, Hong Kong, Pforzheim and Manchester.

Operating result and net income
High demand for products by its own brands as well as good capacity utilization in many areas of production significantly increased the operating result by 69.5% to 629 million francs in the first half of the year, which corresponds to an operating margin of 14.7% (previous year: 10.0%). Net income improved 66.5% to 468 million francs or 11.0% of net sales (previous year: 7.6%).

Investments
Across all segments, the Swatch Group invested a total of 242 million francs in non-current assets in the first half of 2018, 18.6% more than in the first half of the previous year, in order to increase production capacities where necessary and to accelerate further optimization of retail and customer service networks.

Cash Flow and net cash position
Within the scope of the share buyback program 2016-2019, the Swatch Group repurchased a total of 107,300 bearer shares (previous year: 184,700) and 577,000 registered shares (previous year: 1,001,250) with a market value of 92 million francs (previous year: 135 million francs) in the first half of 2018. The volume of shares repurchased since the beginning of the program amounts to 628 million francs. The net financial position at the end of June was 1.3 billion francs.

Inventories
Inventories increased since the beginning of the year by close to CHF 380 million or 6.0%, to 6.7 billion francs at the end of June. Of this increase, approximately 80% (resp. 300 million francs) applies to gold and diamonds. With high utilization of production capacities, material usage and inventories have naturally also risen. For an industrial company which manufactures durable consumer goods with extended customer guarantees and a supply capability for replacement parts of, in some cases, over 30 years, a rich inventory level is a prerequisite for healthy growth. Even more so when many innovations are developed every year. In view of the turbulence in global trade, with the introduction of punitive tariffs, it is strategically even more important to increase stocks of essential raw materials.

Outlook second half-year 2018
The month of July continues the very positive trend. The second half of the year offers excellent opportunities for continued strong growth and further expansion of market share. Consumer demand, particularly from millennials, for authentic innovative brand products is greatly increasing on a worldwide scale, regardless of region or price segment. Consumers want real values, not only materially but also emotionally. This can be seen worldwide as a clear countertrend to total “commodity consumerism” (where everything is interchangeable and quickly loses its value). Increasing interest in pre-owned and vintage products favours strong, innovative and authentic brands. This is an immense opportunity for the 18 Swatch Group brands.

Numerous new collections
This year, Blancpain will launch the Fifty Fathoms Bathyscaphe Day Date in 1970s style, as well as other classics such as the Villeret Tourbillon, updated to the newest technological standards. Omega will introduce the Seamaster Professional 300m diver’s watch. This brand launched its second “Speedy Tuesday” on 10 July 2018 with the sale of 2,012 Speedmaster Limited Edition “Ultraman” watches, which sold out in a record time of one hour and 53 minutes. Longines will expand its Conquest Collection with another VHP watch (Very High Precision, a highly accurate quartz movement with a virtually perpetual calendar) with GMT flash setting. Rado will introduce a new DiaMaster collection, called Ceramos, with the latest material combination - ceramic and rose gold. Swatch will launch additional models to the successfully introduced Skin Irony.

August 16, 2018