Biel / Bienne (Switzerland): Half-Year Report 2009 – Swatch Group a strong outperformer in the current challenging economic environment

• Strong outperformance compared to Swiss Watch Federation export sales, with gross sales reaching CHF 2’480 million in the first six months of 2009 (–15.3% compared to an absolute record first half-year 2008, adjusted by divestments).
• Further expansion of market shares in all watch segments and regions, due to consistent distribution and product strategy, strong innovation, new product development and highly motivated personnel.
• Despite very strong ongoing marketing activities and high R&D investments as well as the clear commitment to preserve jobs for its employees, still high operating profit margin of 14.7% of net sales or CHF 345 million (21% or CHF 593 million in the record first half-year 2008, representing a decrease in operating profit of 41.8%) in a challenging economic environment.
• Consolidated net income of CHF 301 million or 12.8% of net sales (CHF 418 million and 14.8% in the first half of 2008, a decrease in net income of 28%) thanks also to a positive financial result.
• Substantial improvements in accounts receivable days outstanding confirm strong demand for Swatch Group products.
• Ongoing selective and strong expansion of retail and distribution activities, taking advantage of opportunities in the current challenging economic environment.
• Sales and operating margin achieved in May and June compared to the first four months of the current year show a very positive trend, which is confirmed in July and will continue in the months to come despite order cancellations for components from third-party watchmakers.

The first half of 2009 was marked by a very challenging economic environment with a drop in demand and a declining consumer confidence worldwide. The Swatch Group was much more resistent to this negative development than most of the industry, with gross sales decreasing on a comparable basis (excluding the two divestments made in 2008) by only 15.3% to CHF 2’480 million. This result is by far better than the export figures for the first half-year 2009 published by the Swiss Watch Federation.

The Swatch Group is benefitting from its worldwide presence and the excellent positioning of its 19 internationally known brands in all price categories. This success factor has enabled the Group once more to increase market shares in all watch segments and regions.

Unlike in the previous period, the global effects of the volatility of foreign currencies did not have a material impact on Group sales (–0.1%). In the current economic environment, the Group is continuing to take advantage of interesting opportunities in the retail and distribution activities in order to consolidate brand presence over the long term.

Operating profit declined by 41.8% to CHF 345 million. This represents an operating profit margin of 14.7% of net sales, compared to 21% in the first half-year 2008, despite very strong ongoing marketing activities and high R&D investments as well as the clear commitment to preserve jobs for its employees. Net income realized is CHF 301 million, compared to CHF 418 million in the first half of 2008. The decrease was less important than on operating profit level, thanks to the positive correction on the financial markets mainly in the second quarter. With CHF 247 million, the operating cash flow was almost at the same level as in the first semester 2008 (CHF 268 million).

Outlook

The Group’s unique brand portfolio and worldwide presence in distribution, combined with its solid equity and liquidity base, will enable the Group to largely overcome the difficult economic conditions and to emerge from them even stronger.

A main growth driver in the coming months will continue to be the improving sales in most of the countries where demand should pick up with the anticipated weakening of the recession. The sales development in the last two to three months as well as current order entries show signs of recovery. This positive trend has been clearly confirmed in July 2009.

Retailer destocking is about to slow down, and they start again to re-order at a normal level. New product launches from Breguet, Tiffany, Omega’s new Constellation line, the new mechanical movements for Tissot and Swatch as well as new product development in practically all brands will further improve Group sales.

Overall this should enable the Group to realize sales in the second half-year 2009 comparable to or for several important brands even better than the last six months of 2008. Stronger cost reduction measures have been applied where necessary, without harming the Group’s long-term strategy of continued growth. Marketing activities will remain at a similar level as last year. Foreign currencies are expected to remain stable, with a slight negative impact on sales until the end of 2009.

With the strong balance sheet as well as the healthy cash position, the Group certainly is in a favorable situation to seize opportunities when available.