Informations

Press release
21 August 2003

Swatch Group:
commentary on the first half and prospects for the year 2003 as a whole.

Biel-Bienne, August 21, 2003

• Despite the strong Swiss franc, the trend in the first quarter of 2003 was positive. Sales in local currencies were +7 %, or –0.7 % in Swiss francs. As at March 31, 2003, the operating result was 6.5% above the figure for the same period last year.
• Second-quarter sales weakened as a result of exceptionally strong negative factors such as SARS, sluggish consumer spending, the continuing strength of the Swiss franc against all relevant currencies with the exception of the euro, and the drop in worldwide tourism of –8.9 % in local currency terms; the overall result was a decline in first-half sales of -1.3% compared to the previous year (–6.6 % in Swiss francs). (Negative currency impact in the first half of 2003, CHF 102 million).
• Decline in net income for the Group attributable to sales and currency factors – 9.7 % to CHF 186 million (CHF 206 million prior year).
• Optimistic outlook for the second half of 2003, due to positive developments in July. Recent reports from our own retail stores and other jewelers confirm this positive trend in August, based on increasing visitor numbers and sales.

Key figures for the Group as a whole

  1st half 2003 1st half 2002 Variance %
In million CHF     in local currency in CHF
Gross sales 1.816 1.944 -1.3% -6.6 %
Operating result before depreciation & amortization (EBITDA)
- as a percentage of gross sales

329
18.1%

373
19.2 %

  -11.8 %

Operating result (EBIT)
- as a percentage of gross sales

224
12.3%
271
13.9 %
  -17.3 %
Net income
- as a percentage of gross sales
186
10.2%
206
10.6 %
  -2.0 %
----------------------------------------------------------------------------------------------------------
Investments in tangible assets
94 97   -3.1%
Equity, end of June 3.691 3.330   10.8%

Market capitalization, end of June
Per register share
-Net income
-Equity, end of June



0.64
12.64


0.71
11.41
 

-9.9%
10.7%
Per bearer share
-Net income
-Equity, end of June

3.18
63.19

3.53
57.07
 
-9.9%
10.7%
----------------------------------------------------------------------------------------------------------
Total unit sales: watches, movements, stepping motors (million units) 60.3 53.7   12.3%

Commentary

After a good start to the year 2003 – despite the strength of the Swiss franc – strong sales growth of +7 % was achieved in the first quarter in local currency, but this was neutralized in Swiss francs by monetary influences, especially that of the US dollar and allied currencies. The operating result for the first quarter was, in effect, slightly higher than in the same period last year. However, subsequent months were sharply hit by the adverse effects of the respiratory illness SARS, the decline in travel, warfare, and general weakening in consumer spending. Combined with the slightly less marked, but still negative monetary influences in the second quarter (CHF 102 million in the first half alone, after CHF 70 million for the first half of 2002 in comparison to 2001 and CHF 166 million for the full year 2002 were already reported), an exceptional decline in sales amounting to CHF 128 million or -6.6 % was reported in the first half as compared to the same period in the previous year.
These factors, and their sudden impact on sales could not have been planned, and the resulting margin shortfall could not be offset immediately by cost-cutting measures. In addition, the Group did not wish to cut costs either in the marketing area or in research and development. Moreover, despite massive exchange losses, local price increases were practically never made, except in a few isolated cases and with great reluctance, i.e. on less than 2% of sales. Active presence in all markets and our close proximity to our customers enabled us to gain additional market share in this difficult environment.
However, in comparison with the same period last year, the operating result declined -17.3 % to CHF 224 million. Net income for the Group was down -9.7 % at CHF 186 million, due to improvement in the financial result.
The normalization and even improvement in business observed in many markets, together with the slow recovery of travel and tourism, brought increased sales in July in local currencies, and the same level overall in comparison to the previous year in Swiss francs. Despite persistent weakness in consumer spending in several European countries, this encourages us to take an optimistic view of the second half of 2003. Assuming that exchange rates remain within the present bandwidth, the negative currency influence amounting to a total of CHF 102 million observed in the first half is likely to level off further in the second half. Continuous efforts on the cost side will have an even greater impact in the second half of the year. The Group’s long-term expansion plans are therefore not called into question in any way.
The Board of Directors and Group Management are confident that the Group has strengthened its leading position in the watch market, even under difficult conditions and confronted with unforeseeable factors, and will further extend this position with a positive second semester.

RESTATEMENT OF THE SEGMENTS

To better accomodate the products and markets of Microcomponents and Omega Electronics within Group structures, these two companies have been transferred from «Production of Watches, Movements and Components» to the «Electronic Systems» segment. The resulting changes for the two business areas, accompanied by comparative prior year figures, are shown below. Figures for sales and results at Group level remain unchanged.

PRODUCTION OF WATCHES, MOVEMENTS AND COMPONENTS

  1st half of 2002
(Restated in 2003)
1st half of 2002
(Published in 2002)
Evolution
In million CHF     in CHF in % CHF
Gross sales
-of which to third parties
643
318
700
386
-57
-68
-8.1%
-17.6%
Operating result before depreciation & amortization (EBITDA)
- as a percentage of gross sales

98

15.2 %

105

15.0 %

-7 -6.7 %

Operating result (EBIT)
- as a percentage of gross sales

38
5.9 %
43
6.1 %
-5 -11.6 %

ELECTRONIC SYSTEMS

  1st half of 2002
(Restated in 2003)
1st half of 2002
(Published in 2002)
Evolution
In million CHF     in CHF in % CHF
Gross sales
-of which to third parties
259
232
190
164
69
68
36.3%
41.5%
Operating result before depreciation & amortization (EBITDA)
- as a percentage of gross sales
54
20.8%

47
24.7%

7 14.9%
Operating result (EBIT)
- as a percentage of gross sales
36
13.9%
31
16.3%
5 16.1%

WATCHES

1st half 2003
1st half 2002
Varience %
In million CHF     en monnaies locales en CHF
Gross sales 1267
1380
-1.7%
-8.2%
Operating result before depreciation & amortization (EBITDA)
- as a percentage of gross sales

197
15.5 %

231
16.7 %

  -14.7 %

Operating result (EBIT)
- as a percentage of gross sales

175
13.8 %
209
15.1 %
  -16.3 %

Sales in local currency terms were down -1.7% in the first half of 2003 against the same period last year; this brought an overall decline of -8.2%, taking into account currency losses of -6.5 % in Swiss francs (negative currency impact CHF 90 million).
As far as the individual brands are concerned, further organic growth of the prestige and luxury market segment can be obeserved, with Breguet once again reporting impressively strong gains. However, this should not be allowed to detract from, or leave unacknowledged, the favourable development achieved by other brands belonging to the Swatch Group, namely Omega, Blancpain and Glashütte. In the upper market segment, particularly Rado registered declining sales in German-speaking regions and other important markets.
The middle market segment showed a positive trend, especially with Tissot and cK. In the basic market segment, Swatch was hit in the months of May and June by a drop in tourism and negative monetary influences. This was apparent at airports such as Zurich, London and Milan and also, for instance, on the Via Montenapoleone in Milan, Champs-Elysées in Paris and Times Square, New York. The temporary but strong adverse influences in the regions hit by SARS were yet another difficulty. As planned, the private label business underwent further downsizing.
Following organic growth in the early months of the year, weaker business was particularly marked in the second quarter. These short-term declines and the resulting lower margins, as well as retention of our substantial marketing, research and development expenditure, led to a decrease in the operating result of -16.3 % to CHF 175 million, even though cost control was treated as a matter of the utmost priority.
Despite adverse circumstances and difficulties in many regions of continental Europe, where depressed consumer sentiment continued to spread, growth opportunities were apparent both in important markets with continuous economic advancement as well as in new markets in which our expansion and development activities now focus. New growth will require the launch of various new products which the Swatch Group has already prepared; it also depends on the absence of additional negative factors, including any further substantial gain in the value of the Swiss franc.

 

PRODUCTION OF WATCHES, MOVEMENTS AND COMPONENTS

1st half 2003
1st half 2002
Variance %
In million CHF     in local currency in CHF
Gross sales
-of which to third parties
650
306
643
318
2.3%
1.1%
-3.8%
Operating result before depreciation & amortization (EBITDA)
- as a percentage of gross sales

87
13.4 %

98
15.2 %

  -14.7 %

Operating result (EBIT)
- as a percentage of gross sales

27
4.2 %
38
5.9 %
  -28.9 %

The decline in sales of movements and components to third parties was more than offset by higher orders placed within the Group. A negative monetary influence was observed on sales of watch movements in the low-end price category produced in the Far East and sold in Hong Kong; in this segment, the sustained pressure on prices was offset by the production of a new and more economical modern quartz movement version. Among the mechanical movements, the decline in sales of movement blanks (ébauches) was more than compensated by an increase in fully-assembled movements. Swiss-made quartz movements also reported growth. Third-party sales trends in the second half of the year for movements and components are difficult to estimate.
Substantial investments to modernize and enhance product diversity have been approved and these, together with structural and process improvements, will enable further cost optimization to be achieved. Turning to our production facilities in the high price segment, all existing capacities are currently undergoing an optimization analysis in order to create the best possible conditions for the expansion and investment measures which will be necessary in future.

ELECTRONIC SYSTEMS

  1st half 2003
1st half 2002
Variance %
In million CHF     en monnaies locales en CHF
Gross sales
-of which to third parties
249
223
259
232
-2.7%
-3.9%
-3.9%
Operating result before depreciation & amortization (EBITDA)
- as a percentage of gross sales

51
20.5 %

54
20.8 %

  -5.6 %
Operating result (EBIT)
- as a percentage of gross sales
30
12.0 %
36
13.9 %
  -16.7%

Declining sales are directly related to the trends in the markets served by the different companies. Lasag was affected by declining industrial investments; so too was Oscilloquartz in respect of sales to Telecom companies which are, in some cases, operated by state-owned organizations. At Microcrystal, good use of production capacity is still being made, but with sustained pressure on prices. The Microcomponents organizational unit which is now allocated to this division was able to report a pleasing growth of business in stepping motors. Renata responded to growing pressure on costs by outsourcing battery packaging to the Far East. EM Marin reports a higher order backlog and is also benefiting from the acquisition of Sokymat, which did not, however, have any significant influence on the consolidated figures for the division.
A modest improvement in these business areas looks likely in the coming months.

Net financial result
The net financial result at the end of June 2003 compared to last year shows a positive trend due to a marked reduction in exchange losses.
Outstanding bonds
No bonds were issued during the period January to June 2003.
Treasury shares
A total of 33,639 registered shares and 0 bearer shares were sold in the first half of 2003.
Basic earnings per share were calculated by dividing the net result for the period by the number of outstanding shares. Proprietary shares held by the Group are not included. This concerns as of 30.06.2003: 12,354,890 registered shares and 44,000 bearer shares; as of 31.12.2002: 12,388,529 registered shares and 44,000 bearer shares.
Given the absence of any convertible loan, diluted earnings per share are identical to basic earnings per share.

Dividend
The company pays one single dividend for each financial year. For the year 2002, the following dividend was paid out on June 3, 2003, pursuant to the decision taken at the Ordinary General Meeting of May 28, 2003, i.e.:
Dividend per registered share CHF 0.22
Dividend per bearer share CHF 1.10
Representing a total of CHF CHF million 64.2

Post balance sheet events
No significant new event likely to modify the valuation of the financial statements at the end of June 2003 was indicated at the time the text for this report was finalized.

 

Contacts

Edgar Geiser, CFO, et Thomas Dürr, Corporate Treasurer
The Swatch Group SA, Biel-Bienne
Tél. : +41 32 343 68 11, Fax +41 32 343 69 16
e-mail : investor.relations@swatchgroup.com

Béatrice Howald, PR & Press Office
The Swatch Group SA, Biel-Bienne
Tél. : +42 32 343 68 33, Fax +41 32 343 69 22
e-mail : presse@swatchgroup.co


 

 

 

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