There had been fears of a longer phase of sluggish growth or even serious recession in the watch business.
But now it shows that the business seems to recover quicker than expected. True to the motto "Energy results from calmness" Swatch Group just presented encouraging results for the first half-year 2017.
To really be successful in the watch business one should avoid panicky short-term reactions, what it needs are steadiness and continuity ...
In the text below my personal remarks are in Italics and Bold.
In my opinion the fact that the successful long-term Swatch Group strategy remains unchanged pays off:
1. Manufacturing base Switzerland for all segments;
2. Sustained investment in innovation, both in product development and in production;
3. Selective expansion of its own retail network including E-Commerce.
This is in my honest opinion the key point:
The long-term Swatch Group strategy and philosophy to keep its personnel employed, despite lower sales in Production, and to invest in the production base Switzerland, remain deliberately unchanged. This allows quick reaction to the noticeable increase in demand for watches and jewelry, which has been observed since last autumn.
These are the official highlights published for the first half 2017:
Development in the segments and countries
Sales performance in Watches & Jewelry was very positive, although it was dampened by the ongoing unfavorable exchange rate situation and lower production sales to third parties. The entire segment achieved net sales of CHF 3 576 million. Compared to the previous year, this is a decrease of 0.3% at current exchange rates, however, an increase of 1.2% at constant rates.
Sales performance in local currency varied, depending on the region. Mainland China recorded significant growth. Sales in Hong Kong have stabilized. Japan showed a mixed picture. Sales to local consumers were very positive, while sales to Chinese tourists decreased due to the negative currency situation. Swatch Group recorded very positive sales in the Middle East. In Europe, sales of the brands increased compared to the first half of the previous year, this in Great Britain, Spain, Italy, and also again in Switzerland. The North American markets showed growth in local currencies, especially in the Group’s own retail. With conversion of sales at the weak USD rate, no growth remains in CHF. Wholesale has started to regain trust in many regions, thanks to the good consumer mood and the positive results achieved in the Group’s retail business.
Production, which is integrated into the Watches & Jewelry segment, recorded lower capacity utilization than in the prior-year compara- tive period. Particularly third-party brands are very insecure and delay orders. Conversely, Group brands increased orders compared to the previous year. Production of certain components, particularly watch cases, was again ramped up. Also, integrated gold production, from foundry to production of semi-finished goods, was centralized in one production site in Switzerland, which not only led to synergies but also optimized the entire production flow.
The Electronic Systems segment generated net sales of CHF 133 million in the first half of the year, corresponding to a slight decrease of 2.2%. Sales are very sensitive to the strength of the Swiss franc versus the USD and JPY, which did not favor this industrial area in the first half of the year. It can be stated that industry could not compensate for the Swiss franc shock. The operating profit in the Electronic Systems segment closed at break even.
Again in the first half of 2017, jobs were deliberately maintained, particularly in Production, where the capacity utilization was less than in the previous year, this was at the cost of a temporarily lower operating margin. As a result, the number of employees at the end of June 2017 was approximately 35 000.
It´s all about personal appreciation and loyalty towards the work force and in this field the Swatch Group deserves highest respect.
The Swatch Group promotes vocational training at all levels. By the end of June 2017, more than 260 graduates received a professional diploma, of which 155 persons completed a regular apprenticeship in Switzerland. In Switzerland, roughly 150 apprentices were newly hired this year, so that the number of trainees in Switzerland is now approximately 450. Abroad, there are currently over 120 trainees, of which more than 60 at Glashütte Original alone. In addition, the Swatch Group is training approximately 150 students in its own watch- making schools in Miami (USA), Kuala Lumpur (Malaysia), Shanghai and Hong Kong (China), Pforzheim and Glashütte (Germany), and Manchester (UK). Almost all graduates have accepted positions within the Group.
Operating result and net income
Despite the lower utilization in Production and in the Electronic Systems segment, an operating result of CHF 371 million was achieved, corresponding to an operating margin of 10.0%. Net income reached CHF 281 million or 7.6% of net sales.
A proof that Swatch Group acts as a real entrepreneur.
The Omega Speedmaster, now celebrating its 60th anniversary, is and remains an absolute bestseller. The “Speedy Tuesday”, launched in January, was sold out online in approximately four hours. Swatch ensured good revenues with the launch of the New Skin, Swatch X You and Sistem51 Irony. The first editions of the Longines Master Collection Blue and the Tissot Ballade Silicium and T-race Cycling ensured high volumes. Particularly in the Prestige and Luxury segment, new products accelerated growth into the high double digits. Harry Winston grew not only with its high jewelry collections Lotus Cluster, Art Deco and Sunflower, but also with its new most exclusive watch models such as the Midnight Date Moon Phase. Breguet was successful with its new ladies’ watches Tradition and Phase de Lune, and Blancpain with the Villeret and Bathyscaphe collections.
At Swatch Group you get real value for money - for sure one good reason why the products sell well.
Across all segments, the Swatch Group invested a total of CHF 204 million in non-current assets in the first half of 2017. The Group’s retail network was selectively broadened with the opening of new boutiques in the best locations of growth regions, and Production was optimized with the latest equipment. Significant investment was also made in worldwide customer service.
Operating cash flow increased compared to last year from CHF 381 million by 14.7% to CHF 437 million. To keep the cash balance low, and in order to avoid negative interest, a three-year share buyback program with a repurchase volume of maximum CHF 1 billion was launched on 5 February 2016. During the first semester 2017, treasury shares with a market value of CHF 135 million have been repurchased. The total volume repurchased since the beginning of the program amounts to CHF 467 million (details see note 8).
Inventories have decreased slightly in value since the beginning of the year and amounted to approximately CHF 6.2 billion at the end of June, despite the fact that the retail network has been further expanded and many new products for the second half of the year are already in the production pipeline.
Outlook second half-year 2017
The Swatch Group anticipates very positive growth in local currency in the second half of the year. In addition to its already strong own retail business, wholesale should also develop positively, due to the gradual dissolution of uncertainty among individual distributors. In addition, further growth will generate improved capacity utilization in all production areas.
Omega and the IOC have extended their timekeeping contract for the Olympic Games by an additional 10 years, up to and including the Olympic Games 2032, so that Omega’s term as official timekeeper of the Olympic Games will now total 100 years. In the second half of the year, Omega will launch new products such as the Seamaster Planet Ocean Big Blue, the Speedmaster Racing Co-Axial Chronometer and the Speedmaster 38 mm Collection onto the market. Blancpain with the new Bathyscaphe 38 mm and the Villeret 6104 ladies’ watch, as well as Breguet with the Tradition Dame and the Classique Phase de Lune will support growth. Together with the new Harry Winston collections, the entire Prestige and Luxury brand sector will further accelerate growth in the second half of the year. Longines will cause a sensation and add further momentum with the Conquest V.H.P. (very high precision quartz movement with an almost infinite calender), as well as Tissot, with the launch of the Chrono XL NBA and Every Time Swissmatic. This Tuesday, Swatch launched the unique Swatch Pay with its full credit card function in Shanghai, in partnership with UnionPay and 11 Chinese banks.
Incoming orders have further increased in the last months in the technology companies, thanks to a significant technological advantage in the area of Dual Frequency RFID technology (NFC and UHF), the smallest integrated circuits with minimum power consumption (lowest power ICs), and the new Real Time Clock (RTC) modules.
I am convinced that the trend will stay positive also for the second half of 2017.
This is a brief summary of the Swatch Group Half-Year Report 2017
Group net sales, +1.2% at constant exchange rates, of CHF 3 759 million, or CHF 3 705 million, -0.3% at current exchange rates.
• Sales growth of +2.9% at constant rates in the Watches & Jewelry segment (excluding Production). Sales for the whole segment, including Production +1.2%, adversely affected by low Production sales to third parties.
• Operating margin in the Watches & Jewelry segment (excluding Production) increases by almost 25%, from 10.7% to 13.2%, despite negative currency impact. The Watches & Jewelry segment, including Production, achieved an operating margin of 11.8% (previous year: 11.2%).
• Operating result increases by 5.1% to CHF 371 million, despite retention of production capacities for third parties and workforce. Operating margin grows from 9.5% in the previous year to 10.0%.
• Net income increases by 6.8% to CHF 281 million with a net margin of 7.6% (previous year: 7.1%).
• Accelerated growth of all brands in local currency in June and the first weeks of July, most pronounced in the Prestige and Luxury segment. The retained production capacities allow quick response to the positive development.
• Strong growth in local currency in the Group’s own retail network.
• Positive outlook for the second half of 2017 with many new product launches. Good development in Production, which will mainly profit from the growth of the own brands, not only in value but also in volumes.