Press release
SWATCH
GROUP: HALF-YEAR REPORT 2006
BIEL/BIENNE,
24 AUGUST 2006
• Strong
sales performance: Increase of 13.1% to more than CHF 2.3 billion
• Operating profit:
- Above-average increase of 37.2% from CHF 293 million to CHF 402 million
- Operating margin up from 14.8% to 18.0%
• Net income:
- Marked increase of 23.6% to CHF 330 million
- Net margin up from 13.5% to 14.7%
• Positive outlook for the second half-year
Key figures for the Group as
a whole
|
In
CHF millions |
1st
half 2006
|
1st
half 2005
|
%
change
|
|
|
|
in
local currency
|
in
CHF
|
Gross
sales |
2347
|
2075
|
11.0%
|
13.1%
|
Net sales |
2239
|
1980
|
13.1%
|
Operating
result (EBIT) |
402
|
293
|
37.2%
|
-
in % of gross sales |
18.0%
|
14.8%
|
|
Net
income |
330
|
267
|
23.6%
|
-
in % of gross sales |
14.7%
|
13.5%
|
|
|
|
|
|
Investment
in tangible assets |
104
|
71
|
46.5%
|
Equity,
30 June |
4 569
|
4
484
|
1.9%
|
Market
capitalization, 30 June |
12 587
|
10
996
|
14.5%
|
|
|
|
|
Annualized return on equity (ROE) |
14.4%
|
12.2%
|
18.0%
|
Basic earnings per share (EPS) – expressed
in CHF per share
- Registered shares
- Bearer shares
|
1.17
5.83
|
0.92
4.58
|
27.2%
27.3%
|
Unaudited figures. |
|
|
|
COMMENTARY
All Swatch Group segments contributed to the Group’s remarkable performance
in the first half of 2006. Sales were up by a substantial 13.1% (organic
growth was 11.0%). Currency effects boosted sales by 2.1%.
The excellent figures – sales and operating results – for the first half
of 2006 are primarily attributable to the strong demand for watches in
all price categories, but particularly in the top price segment.
The Swatch Group brands registered growth everywhere and increased their
market share, in some regions quite substantially. This goal was achieved
by a higher marketing spend (events, advertising, improved visibility,
etc.). In addition, the brands successfully expanded their presence in
key markets by opening proprietary shops in prime locations that present
the values of the brand in the right light.
The watches, movements and components production segment likewise saw
very pleasing growth, mainly due to the vigorous demand for mechanical
movements. The gradual closure of Far East production facilities for watch
movements in the lowest price segment during last year and the beginning
of the current year affected the comparison base only marginally.
The strong performance of the cyclical electronic systems segment is visible
both in sales and particularly in excellent profitability. This development
was supported by the upbeat trend in the market for integrated circuits,
especially in the RFID sector and in mobile telephony.
By pursuing a cautious investment policy the Swatch Group was able to
report a positive financial result, despite the weakness of the financial
and foreign exchange markets, albeit lower than a year earlier. As expected,
the tax rate came in at a higher level than in the previous year.
The Group’s balance sheet ratios are extremely solid with an unchanged
equity ratio of 69.9%, even after payment of a higher dividend and taking
into account the current share buyback program.
Outlook
Given the Swatch Group’s ongoing creativity, lively innovative spirit
and strategic direction, backed up by its strong portfolio of brands,
the Executive Group Management Board and the Board of Directors are very
optimistic for the remainder of the year. The expansion of capacities
to overcome the current production bottlenecks will be undertaken with
great caution, given the shortage of qualified workforce, particularly
watchmakers, observable in the market. After the record year 2005, the
Group still aims to achieve another highlight in its development.
The Swatch Group’s expectations for the second half of the year are high.
It is nevertheless alert to the current economic and political environment,
which may have a dampening effect on consumer spending over the remaining
months of 2006. The positive currency effect felt in the first half of
the year could also weaken somewhat in the second half. We have accordingly
hedged the major currencies appropriately.
WATCHES AND JEWELLERY
|
|
1st half 2006
|
1st half 2005
|
change in %
|
In
CHF millions |
|
|
in local currency
|
currency effect |
Total
|
-
Third parties |
1761
|
1 548
|
|
|
|
- Group |
0
|
0
|
|
|
|
-
Total |
1761
|
1548
|
11.0%
|
2.8%
|
13.8%
|
Net sales |
1677 |
1 473 |
|
|
13.8% |
Operating
result |
292 |
241 |
|
|
21.2% |
- in % of
net sales
Unaudited figures.
|
17.4% |
16.4% |
|
|
|
Sales in the watch segment were up in first-half 2006 by 11.0% in local
currency and by 13.8% in Swiss francs. All brands contributed to this
strong sales growth, although the strongest increase was visible in the
top price segment. All the other watch brands in the portfolio saw very
solid growth rates, and their market and brand positioning was strengthened
in all regions of the world.
Breguet continues to post the strongest growth rates, closely followed
by the other luxury brands.
In the basic range the Swatch brand is exhibiting an excellent performance.
In the first half of 2006 the Group stepped up its marketing efforts.
This included the presence of Omega at the February 2006 Winter Olympics
in Turin, Omega’s participation in the «SolarImpulse» project, the successful
launch of the new Swatch models «Jelly in Jelly» at an event celebrating
the 333 millionth Swatch watch in Lugano attended by international celebrities,
the Tissot brand’s presence at the Nascar races in the USA and many other
events. These activities resulted in a higher marketing spend, which should
positively impact sales through the second half-year as well.
The above-average increase in operating profit in the watch segment can
be ascribed to the factors product mix, volume increase, cost discipline
and a positive exchange rate development. The shift in product mix towards
the high price segment is, however, clearly the main factor underlying
the increase in profitability.
In terms of individual regions, Asia is still a major contributor to the
Group’s success, but the US and Europe are also showing solid growth with
accelerating momentum. Improved consumer sentiment, mainly in Europe,
has helped to put all the European economies back on a growth path.
PRODUCTION OF WATCHES, WATCH MOVEMENTS AND
COMPONENTS
|
|
1st half 2006
|
1st half 2005
|
% change
|
In
CHF millions |
|
|
in local currency
|
currency effect |
Total
|
Gross
sales |
|
|
|
|
|
- Third parties |
298 |
277 |
|
|
|
- Group |
395 |
382 |
|
|
|
- Total |
693 |
659 |
5.0% |
0.2% |
5.2% |
Net sales |
662 |
622 |
|
|
6.4% |
-
of which to third parties |
260 |
244 |
|
|
|
Operating profit
|
65 |
29 |
|
|
124.1% |
- in % of
gross sales
unaudited
figures
|
9.8% |
4.7% |
|
In the watches, movements and components production segment sales rose
by 5.2%. This was primarily due to the strong trend of sales in mechanical
movements. This was slightly impacted by the already sharply reduced watch
movement production activities in the lowest price segment in the Far
East.
The ongoing shift in the product mix towards mechanical movements and
the absence of special factors in the prior-year period coupled with additional
improvements in efficiency have resulted in an above-average increase
in profitability in this segment. Rationalization and closure costs had
negatively impacted the prior-year figures by some CHF 6 million. Even
adjusted for these non-recurring factors, the operating margin was significantly
higher, exceeding the Group’s previously communicated medium-term margin
target of 7%.
The Group companies in this segment had full order books at 30 June 2006.
This situation will require investments in the targeted expansion of capacities,
some of which are already underway.
ELECTRONIC SYSTEMS
|
|
1st half 2006
|
1st half 2005
|
% change
|
In
CHF millions |
|
|
in local currency
|
currency effect |
Total
|
Gross
sales |
|
|
|
|
|
- third parties |
285 |
247 |
|
|
|
- group |
13 |
16 |
|
|
|
- Total |
298 |
263 |
13.1% |
0.2% |
13.3% |
Net sales |
294 |
260 |
|
|
13.1 |
of
which to third parties |
244 |
243 |
|
|
|
Operating result (EBIT) |
56 |
34 |
|
|
64.7% |
-
in % of gross sales |
19.0% |
13.1% |
|
|
|
unaudited
figures
|
|
|
|
|
|
Sales in the electronic systems segment were up 13.3% in the first half
of the year. This is primarily due to increased demand from the mobile
telephony sector and the semiconductor industry as well as to the continued
expansion of RFID activities at EM Marin.
Given the growing volumes and strict cost controls, the operating margin
saw a considerable increase.
The ever-shortening cycles in these industry sectors together with the
hard-to-match prior-year comparison base of second-half 2005 represent
a substantial challenge for the segment over the remainder of the year.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of preparation
The unaudited interim condensed consolidated financial statements for
the six months ended 30 June 2006 have been prepared in accordance with
IAS 34 «Interim Financial Reporting». These interim financial statements
do not include all the information and disclosures required in the annual
financial statements, and should be read in conjunction with the Group’s
annual financial statements as at 31 December 2005.
In this interim report, Management has not made any significant changes
to the estimates and assumptions compared to the previous period.
Significant accounting policies
The accounting policies adopted in the preparation of the interim condensed
consolidated financial statements are consistent with those followed in
the preparation of the Group’s annual financial statements for the year
ended 31 December 2005, except for the adoption of the following new and
amended standards and interpretations mandatory for annual periods beginning
on or after 1 January 2006:
• Amendment to IAS 19 – Employee Benefits:
Actuarial Gains and Losses, Group Plans and Disclosures
• Amendment to IAS 21 – The Effects of Changes in Foreign Exchange Rate
• Amendments to IAS 39 – Financial Instruments:
- Cash Flow Hedge Accounting of Forecast Intragroup Transactions
- The Fair Value Option
- Financial Guarantee Contracts
• IFRS 6 – Exploration for and Evaluation of Mineral Resources
• IFRIC 4 – Determining Whether an Arrangement Contains a Lease
• IFRIC 5 – Rights to Interests Arising from Decommissioning, Restoration
and Environmental Rehabilitation Funds
• IFRIC 6 – Liabilities Arising from Participating in a Specific Market
– Waste Electrical and Electronic Equipment
The adoption of these amendments did not affect the Group’s operating
results or financial position. Their impact on the annual financial statements
will be limited to additional disclosures.
Group structure and presentational changes
The consolidation structure comprises 144 legal entities at 30 June 2006,
compared to 140 on 31 December 2005. This increase is due to the creation
and liquidation of various companies as well as the newly acquired subsidiaries
(refer to paragraph 7 Business Combinations). These changes to the consolidation
structure have no significant impact on the half-year figures.
The former segment «General services» is now denominated «Corporate and
elimination». In addition to the Group elimination entries, it includes
the holding companies, research and development companies, real estate
companies and several other companies none of which is of a sufficient
size to require separate presentation.
Furthermore, at 1 January 2006 the sports activities of Omega Electronics
SA were integrated into the company Swiss Timing Ltd. At the same time,
the acquisition of WIGE Data strengthened the position of the Group’s
sports activities. These sports activities are now included in the segment
«Electronic systems» instead of within «Corporate and elimination».
The prior year figures have been restated in order to reflect this switch
between segments. There is no impact on the interim financial statements
2005, and the impact in the second half of 2005 was limited to a transfer
in operating result of CHF 2 million from «Corporate and elimination»
to the segment «Electronic systems».
Segment information by activity sector
in CHF millions |
1st half 2006
|
1st half 2005
|
Gross sales |
Third
|
Group
|
Total
|
Third
|
Group
|
Total
|
Watches and Jewellery |
1761
|
0
|
1761
|
1548
|
0
|
1548
|
Production |
298
|
395
|
693
|
277
|
382
|
659
|
Electronic systems |
285
|
13
|
298
|
247
|
16
|
263
|
Corporate and elimination |
3
|
-408
|
-405
|
3
|
-398
|
-395
|
Total |
2347
|
0
|
2347
|
2075
|
0
|
2075
|
|
|
|
|
|
|
|
Net sales |
|
|
|
|
|
|
Watches and Jewellery |
1677
|
0
|
1677
|
1473
|
0
|
1473
|
Production of watches, movements and components |
278
|
384
|
662
|
260
|
362
|
622
|
Electronic systems |
281
|
13
|
294
|
244
|
16
|
260
|
Corporate and elimination |
3
|
-397
|
-394
|
3
|
-378
|
-375
|
Total |
1980
|
0
|
1980
|
1980
|
0
|
1980
|
|
|
|
|
|
|
|
Operating profit |
|
in % of sales
|
in % of total
|
|
in % of sales
|
in % oftotal
|
Watches and Jewellery |
292
|
17,4%
|
72.6%
|
241
|
16.4%
|
82,3%
|
Production of watches, movements and components |
65
|
9.8%
|
16.2%
|
29
|
4,7%
|
9,9%
|
Electronic systems |
56
|
19.0%
|
13.9%
|
34
|
13.1%
|
11,6%
|
Corporate and elimination |
-11
|
|
-2.7%
|
-11
|
|
-3,8%
|
Total |
402
|
18.0%
|
100.0%
|
293
|
14,8%
|
100.0%
|
unaudited figures |
|
|
|
|
|
|
Seasonality of operations
Due to a certain seasonal nature of the segments «Watches and Jewelry»
and «Production», slightly higher revenues and operating profits are usually
expected in the second half of the year. This is mainly due to strong
sales in the months of September to December relating to the above-average
Christmas season.
Treasury shares / share buyback
Under the completed share repurchase program, which ran from 1 July 2005
to 7 March 2006, 693 450 bearer shares and 3 381 327 registered shares
were repurchased by the Swatch Group. According to the capital reduction
decision by Swatch Group’s General Meeting held on 19 May 2006, share
capital will be reduced during the second half of the year and the repurchased
shares cancelled, in accordance with normal legal procedures.
As announced in the press release of 23 March 2006, a new buyback program
commenced on 24 March 2006. Up to 30 June 2006, the Group acquired own
shares representing a market value of CHF 183 million.
Business combinations
In February and March 2006, the Group acquired 100% of WIGE Data GmbH,
Leipzig and The Swatch Group (RUS), Moscow. The acquisitions have been
accounted for using the purchase method of accounting. The identifiable
assets and liabilities acquired in the transactions and the goodwill arising
are as follows:
(CHF million) |
Provisional
fair value
|
Carrying
amount
|
Property, plant and equipment |
4
|
4
|
Intangible assets |
7
|
1
|
Other non-current assets |
1
|
1
|
Current assets |
9
|
4
|
Cash and cash equivalents |
1
|
1
|
Provisions |
-5
|
-1
|
Current liabilities |
-4
|
-4
|
Net assets |
13
|
6
|
Total purchase consideration |
26
|
|
Fair value of net assets acquired |
13
|
|
Goodwill |
13
|
|
The total acquisition cost basically represents the cash payments made
to the vendors. The costs directly attributable to the acquisitions were
below CHF 1 million.
The goodwill arising from these acquisitions is attributable to the expected
operating synergies from the combinations and the anticipated profitability
of the distribution of the Group’s products in the new markets.
The initial accounting for these business combinations has been determined
provisionally. In accordance with IFRS 3, adjustments to the fair value
assigned to the identifiable assets acquired and liabilities assumed can
be made during twelve months from the date of acquisition.
The operating results contributed by the acquired entities in the period
between the date of acquisition and the balance sheet date were CHF 1
million. Also, if the acquisitions had taken place at the beginning of
the year, the Group’s profit and revenue would not have been changed by
more than CHF 1 million.
Furthermore, in June 2006 the Group acquired an additional 44% of its
subsidiaries in Singapore and Malaysia for a consideration of CHF 25 million,
thereby reducing the minority interests in both entities from 49% to 5%.
In this case IFRS 3 Business Combinations did not apply since the Group
already exercised control before the transaction. Applying the «Economic
entity model», the resulting goodwill was charged directly against equity.
Dividend
The Company pays only one dividend per fiscal year. For fiscal year 2005,
the dividend agreed at the Annual General Meeting on 19 May 2006, with
a value date of 24 May 2006, was distributed as follows:
Dividend per registered share CHF 0.50
Dividend per bearer share CHF 2.50
Total dividend paid CHF million 140
Based on the decision of the Annual General Meeting, the dividend due
on own shares held by the Group was not paid out.
Contingent assets and contingent liabilities
There have not been any significant changes to the Group’s contingent
assets or contingent liabilities since the approval of the consolidated
financial statements for 2005.
Events after the closing date
Upon printing this press release, the company was not aware of any significant
new event that could affect the validity of the halfyear figures as of
the end of June 2006.
Contacts
Edgar Geiser, CFO, et Thomas Dürr, Corporate Treasurer
The Swatch Group AG, Biel-Bienne
Tél. +41 32 343 68 11, fax +41 32 343 69 16
e-mail : investor.relations@swatchgroup.com
Béatrice
Howald, Head of PR/Press, Swatch Group
+41 32 343 68 33, Fax +41 32 343 69 22
E-mail: press@swatchgroup.com
|