Swatch Group announces decreased results

In 2015, Swatch Group generated net sales of 8,636 million Swiss francs at constant exchange rates, equivalent to a slight decrease of 0.9%. The ongoing unfavorable currency situation versus the still massively overvalued Swiss franc reduced Group sales by 185 million or 2.1 percentage points to 8,451 million, -3.0% compared to the previous year. Calculated at constant exchange rates of 2010, the group has lost cumulatively over 4 billion in sales since 2010, over one billion alone in the year under review. The financial year 2015 was shaped by the currency shock caused by the Swiss National Bank (SNB), which decided to abolish the Euro minimum rate at the beginning of the year. As a consequence there were significant shifts in sales in the markets, as well as a marked distortion of the international product pricing structure. Despite this, the long-term strategy of favoring a defensive price adjustment policy over short-term profit thinking was maintained. Calculated in Euros, Group net sales however grew 10.3%.

Highlights of the financial year 2015
In the Watches & Jewelry segment, including Production, net sales decreased 0.8% at constant and 3.0% at current exchange rates compared to the previous year. However, exports of wrist watches for the entire Swiss watch industry had declined 3.6% at the end of December. In the year under review, tourist flows changed constantly and quickly, due to various factors such as currency shifts, infectious diseases such as MERS (Middle East Respiratory Syndrome) in South Korea, changes in travel and stay regulations for tourists and local unrest or uncertainty in various countries.

Consumption has basically not changed and remains very good. Sales developed very positively in local currencies. Sales of watches and jewelry in the Swiss market fell slightly due to the strong franc, this however benefited the Euro zone, where strong double-digit growth rates were recorded in local currency. Sales also showed very strong growth in Japan. In sharp contrast to Hong Kong, sales in Mainland China were positive.

The Group’s retail business recorded strong sales growth. Double-digit growth rates between 20% and 40% were achieved not only in Europe, but also in many Asian countries such as Japan, Taiwan, Singapore, Malaysia, Thailand and also in Mainland China. Retail business also developed very positively on the Middle and North American continent. In the past year, over 100 new retail stores were opened in strategic and best-frequented locations on so called «High Streets», the majority of openings in Asia. Extremely volatile exchange rates, which caused significant price fluctuations in the markets, led to considerable uncertainty among third-party vendors and resulted in reduced sell-in, although sell-through is positive.

The strong shift in travel destinations caused a shift in the regional mix, which also reduced this segment’s operating margin. However the latter, still amounted to 18.8% of net sales. Production, which is integrated into the Watches & Jewelry segment, reported good capacity usage and slightly higher sales than the previous year, driven mainly by demand from the own brands. The new METAS certified antimagnetic Omega Co-Axial Globemaster collection, the Speedmaster 57 Vintage Dial, as well as the Swatch Sistem 51 were the year’s main bestsellers and made a substantial contribution to the good sales results in local currency. Also, newly developed and distributed products in the sector of so-called smart watches such as the Swatch Touch Zero One and the Tissot T-Touch Expert Solar were very positively received by consumers.

In Production, Universo scaled up its new watch hand and index manufacturing in La Chaux-de-Fonds (Switzerland) and Rubattel & Weyermann, a producer of watch dials, has joined them at the same location. Also, the own foundry for internal precious metal processing was extended.

In 2015, the Electronic Systems segment generated practically unchanged net sales of 292 million Swiss francs (-1.4%), although price pressure remaining very high, particularly in comparison to electronic consumer goods from Japan with the yen advantage. A very large proportion of sales in this segment were achieved with new products, which demonstrates not only the very strong innovative power of the segment but also that of Switzerland as a base for development and production. Also, integrated circuit technology in the smart and mobile device products sector was further developed. Renata, which is further strengthening its position as market leader in environmentally friendly batteries with the highest energy density, contributed significantly to this result. The Electronic Systems segment achieved an operating profit of 9 million.

Personnel
Again in 2015, almost 700 new jobs were created, mainly in the retail sector, for new stores. Swatch Group also slightly increased the number of personnel employed domestically, despite the very difficult situation with regard to the production base Switzerland. As a result, the number of employees increased to over 36,000 at the end of 2015.

Training
The Swatch Group promotes vocational training at all levels and in all sectors, particularly for young people who wish to graduate as professional watchmakers or in related technical professions. In Switzerland, roughly 150 trainees were newly hired in various production and training facilities in the year under review. The number of trainees in Switzerland rose to approximately
470. Abroad, there are currently 160 trainees, of which Glashütte Original in Germany is training 90 apprentices. All 124 trainees who were in their final year in 2015 have successfully completed their training and 87% have started jobs within the Group.

Operating profit and net income
Due to the above-mentioned significant shifts in country mix, as well as a marked distortion of its international product pricing structure and the Swatch Group strategy of undertaking only very cautious price adjustments, as well as maintaining the same level of marketing investment, operating profit decreased 17.2% to 1,451 million or an operating margin of 17.2%. Net income was adversely impacted by the strongly negative financial result coming from unfavorable interest and exchange rates, and closed at 1,119 million, 21.0% lower than the previous year. This is equivalent to a net margin of 13.2%, compared to 16.3% in the previous year.

Investments
Across all segments, the Swatch Group invested a total of CHF 755 million in non-current operating assets in 2015. In addition to further expansion of its retail network, intensive investment was also made in production facilities. As well, significant investment was made in the area of customer service, both in Switzerland and in foreign distribution companies.

Outlook for 2016
Group management expects, despite the ongoing challenging environment in various regions, a sustainable development in sales in local currency in 2016, based on worldwide ongoing very good consumption demand for Swiss watches.

With its worldwide distribution network, the Group is in an excellent position to provide its customers with an array of products, even when tourist flows and consequently purchase locations suddenly change, as was often the case in the year under review. The number of patent applications increased again in the year under review, not only in the area of electronic smart and mobile device products, but also primarily for watches and watch movements. Not only new products from the twenty brands, but also all current brand models which benefit from ongoing demand, will contribute to a good year in 2016. Particularly the new METAS certified antimagnetic Omega Co-Axial Globemaster collection, as well as various Swatch watches such as the Swatch Bellamy, launched in China, with its contactless payment function, will generate very positive sales in China and other regions. Also, the Olympic Games in Rio de Janeiro, Brazil, which start in August, will give the Omega brand, the official Games timekeeper, an additional boost. Tissot, through its long-standing partnership with the NBA, the North American professional basketball league, has become the official timekeeper for the NBA, the women’s basketball league WNBA and the NBA Development League, which will generate substantially increased sales for the brand, in both North American and worldwide markets.

Swatch Group, with its strong presence and pioneer role in countries such as China, Russia or India, will continue to generate dynamic growth in local currency in 2016. January 2016 confirms that particularly in mainland China, watch consumption rose strongly compared to the previous year, reason why, the Swatch Group expects growth of well over 5% in 2016 in local currency.

Repurchasing of own shares
The Swatch Group intends to repurchase own shares up to a maximum value of 1 billion Swiss francs. It repurchases them for a reduction of capital or to hold them as treasury shares for at least six years starting from the repurchase date. At the end of a period of six years, Swatch Group has the option, apart from a reduction of capital, to use the shares for acquisitions, equity-linked transactions, for other purposes or to resell the shares. The repurchase of shares started on 5 February 2016 and will last until 4 February 2019 at the latest. The volume of repurchased shares of a maximum of 1 billion will be half on bearer and half on registered shares.

February 19, 2016