Swatch Group half-year report 2008
• Strong sales growth of +17.7% at constant exchange rates (+11% at current 30 June 2008 exchange rates) in the Watches and Jewelry segment despite ongoing capacity bottlenecks and unfavorable exchange rates
• Sales growth of +13.8% at constant exchange rates for the entire Group (+8.5% at current 30 June 2008 exchange rates)
• 16% increase in operating profit to CHF 593 million and to an operating margin of 21% (first half-year 2007: 19.6%), despite negative currency effects and sharp rise in the price of raw materials and precious metals
• Slight decline of 9.1% in consolidated net income to CHF 418 million (prior year: CHF 460 million) as a result of unrealized temporary value adjustments on portfolios and foreign investments due to exceptionally weak stock markets and exchange rates at the end of June 2008. Return on sales of 14.8%
Group overview
Group growth continued unabated in the first half of 2008. In local currency terms, Group sales rose by an impressive +13.8%, however, the negative exchange effect of -5.3% was significant. The strong Swiss franc and, in particular, the fall in the value of the US dollar and many of the currencies linked to the US dollar, negatively impacted Group sales in Swiss francs.
The Group’s strong half-year performance is mainly attributable to the Watches & Jewelry and Production segments. With its internationally known brands in all price categories, the Swatch Group benefits from the strong demand for its watches and jewelry. Market shares, particularly in the watch segment, were also further expanded in the period under review. All regions contributed to the good result. Asia and America achieved clear double-digit growth in local currencies, while sales in this segment in Europe grew at a rate only slightly above the double-digit mark. The sharp rise in sales in the Production segment underlines the sustained demand for watch movements and components.
Additional proprietary retail stores were opened in prime locations. Given the current environment, the Group is consciously exploiting opportunities to consolidate brand presence over the long term.
The sustained, highly cyclical trend in the Electronic Systems segment continued in the first half of the current year. The trend towards lower-priced mobile phones, coupled with declining sales in the automobile industry, slightly depressed sales in this segment.
Stemming from the exceptionally strong downturn on the world’s currency and capital markets at 30 June 2008, value adjustments to invested funds were recorded in the financial result, in particular, to the interest in the leading Hong Kong listed Chinese watch distributor, Xin Yu Hengdeli. These shares lost over 30% in local currency as a result of the general stock market downturn. However, the operational business with Xin Yu Hengdeli is outstanding and will produce excellent results in 2008 as well.
The temporary negative impact on the financial result has already partially decreased in the meantime, and a substantial improvement is expected by year end.
Outlook
An extremely strong industrial base, solid brand portfolios in all segments and a worldwide presence in distribution, whether with its own companies and stores or in fast-growing regional markets with strategically important partners such as Xin Yu Hengdeli in China or Rivoli in the Middle East and India, places the Swatch Group in an excellent position for the second half of the year and beyond.
In the Watches & Jewelry segment, the Swatch Group will continue to promote the worldwide expansion of its distribution structures. Constant progress in solutions to production bottlenecks with targeted investment in the production area will further support growth.
Based on this, the Board of Directors and the Executive Group Management Board are confident for the further course of business for the remainder of this year. Despite all the negative reports of the financial sector and the increase in costs worldwide, the Group Management still expects sales and profitability to show solid positive development in the second half-year. ■
