Swatch : Letter to Shareholders July 14, 2020 Download PDF (376.91 KB)

LETTER TO SHAREHOLDERS

Biel / Bienne, 14 July 2020

SWATCH GROUP: Half-Year Report 2020

• -After a strong January with an operating margin of 21.4% in the Watches & Jewelry segment (without Production) and 17.3% for the overall Group, massive decline due to state-ordered closings of at times up to 80% of distribution channels worldwide.

• -Group net sales of CHF 2 197 million, -43.4% to the previous year at constant exchange rates, or -46.1% at current rates. The strong Swiss Franc reduced sales by CHF 113 million, or -4.9%.

• -Operating loss of CHF -327 million compared to operating profit of CHF 547 million in the previous year.

• -Return to a positive operating result in the month of June for the overall Group.

• -Net loss of CHF -308 million, compared to net profit of CHF 415 million in the previous year.

• -Positive operating cash flow.

• -Solid equity base of CHF 10.8 billion, with an equity ratio of 84.6% and a net liquidity1)of CHF 944 million, 29% or CHF 213 million higher than the previous year.

• -Very high customer demand in all price segments in markets which have already overcome the lockdown. Double-digit growth in Mainland China in May and June compared with the previous year.

• -Strong second half expected, with a positive operating result for the entire year.

1) Cash and cash equivalents and marketable securities and derivative financial instruments minus current financial debts and derivative financial instruments

HALF-YEAR REPORT

Group Key Figures

at constant rates	currency effect	Total
Net sales	2 197	4 078	-43.4%	-2.7%	-46.1%
Operating result	-327	547
- in % of net sales	-14.9%	13.4%
Net result	-308	415
- in % of net sales	-14.0%	10.2%
Investments in non-current assets	139	235
Equity, 30 June	10 826	11 191
Market capitalization, 30 June	9 805	15 176
Basic earnings per share in CHF
- Registered shares	-1.17	1.56
- Bearer shares	-5.87	7.82

Unaudited figures

Highlights of the first half 2020

Promising January

Swatch Group started well in 2020 and in January recorded an operating margin of 21.4% in the Watches & Jewelry segment (without Production) and 17.3% for the entire Group, despite severe weakening in China in the last week of January.

Dramatic decline as a result of country closing measures

Government Covid-19 measures imposed around the globe impacted the Group with full force as of February 2020. Complete lock-downs were introduced in most countries, which led to the forced closing of up to 80% of all retail stores worldwide at times (Group stores and third-party stores). Only e-commerce distribution was partially feasible. Production of watches, jewelry and components was reduced to a minimum, and short-time work was introduced for a significant number of employees. The Covid-19 measures have left deep marks on the half-year figures of the Group, which resulted in a half-year loss for the first time.

Streamlining of the retail network, which had already commenced in the previous year, was accelerated due to the exceptional market situation. In the first half of 2020, approximately 260 stores were definitely closed, which resulted in a significant reduction in emplo-yees abroad. The number of employees has decreased since December 2019 by 6.5% to approximately 33 700 persons. The Group achieved significant cost savings in the areas of purchasing, production, marketing, and rents. However, the areas of research and development as well as training continued unchanged.

HALF-YEAR REPORT

Ongoing sustained customer demand

Customer demand for Group products continues to be strong, both in the prestige and luxury segment as well as in the middle and lower price segment. However, this demand could not be satisfied since the majority of distribution channels worldwide were forced to close.

The following examples of a market with full lockdown (China) and a country with limited lockdown (Korea) show strong growth after the end of the lockdown period in both cases, first in the Group's retail, followed by a delay in wholesale.

China - full lockdown

Retail	Domestic Wholesale
- Sales decline of over 80% during lockdown	- Sales decline of over 80% during lockdown
- Immediate recovery after reopening	- Delayed recovery
- Months of May and June more than 60% over strong previous	- Month of June above previous year
year
Evolution vs. Previous Year's Month
2%4%3%5%9%3%4%0%8%3%

Evolution vs. Previous Year's Month

-3%	-5%
-22%
-32%
-60%
-83%
-86%

Apr19

May19

Jun19

Jul19

Aug19

Sep19

Oct 19

Nov19

Dec19

Jan20

Feb20

Mar 20

Apr20

May20

Jun20

Jun20

Apr19

May19

Jun19

Jul19

Aug19

Sep19

Oct 19

Nov19

Dec19

Jan20

Feb20

Mar 20

Apr20

May20

HALF-YEAR REPORT
Korea - limited lockdown
Retail	Domestic Wholesale
- Sales decrease approximately 15% after initial measures	- Sales slightly minus for one month only
- Following month already with sales increase versus previous	- Following month already with double-digit sales increase
year	versus previous year
- Month of June more than 30% over previous year	- Month of June more than 30% over previous year
Evolution vs. Previous Year's Month	Evolution vs. Previous Year's Month
53%

Apr19

May19

Jun19

Jul19

Aug19

Sep19

Oct 19

Nov19

Dec19

Jan20

Feb20

Mar 20

Apr20

May20

Jun20

Apr19

May19

Jun19

Jul19

Aug19

Sep19

Oct 19

Nov19

Dec19

Jan20

Feb20

Mar 20

Apr20

May20

Jun20

Swatch Group Korea - Total Sales Evolution vs. Previous Year's Month

34%

-10%

Apr19

May19

Jun19

Jul19

Aug19

Sep19

Oct19

Nov19

Dec19

Jan20

Feb20

Mar 20

Apr20

May20

Jun20

Outlook for the second half of 2020

The Group's management is convinced that the sales and profit situation will improve quickly in the coming months, parallel to the further easing of Covid-19 measures in the countries. The positive outlook is strengthened by the new products which will be launched in the second half of the year, as well as the lower cost base. This will lead to increased production capacity in the third and fourth quarter 2020. A positive operating result is expected for the full year.

HALF-YEAR FINANCIAL STATEMENTS

Consolidated Income Statement

100.0
Net sales	2 197	100.0	4 078
1.5 4.8 -22.0 -32.6 -5.4 -0.5 -32.4
Other operating income	62	2.8	61
Changes in inventories	0	0.0	198
Material purchases	-451	-20.5	-899
Personnel expense	-1 020	-46.4	-1 330
Depreciation and impairment on property, plant and equipment	-214	-9.7	-218
Amortization and impairment on intangible assets	-21	-1.0	-22
Other operating expenses	-880	-40.1	-1 321
Operating result	-327	-14.9	547	13.4
-0.0 -0.2 -0.0
Other financial income and expense	-12	-0.5	-2
Interest expense	-1	-0.0	-5
Share of result from associates and joint ventures	-4	-0.2	-1
Ordinary result	-344	-15.6	539	13.2
0.0
Non-operating result	0	0.0	1
Result before income taxes	-344	-15.6	540	13.2
-3.0
Income taxes	36	1.6	-125
Net result	-308	-14.0	415	10.2
Attributable to shareholders of The Swatch Group Ltd	-303	404
Attributable to non-controlling interests	-5	11
Earnings per share in CHF
Registered shares
Basic earnings per share	-1.17	1.56
Diluted earnings per share	-1.17	1.56
Bearer shares
Basic earnings per share	-5.87	7.82
Diluted earnings per share	-5.87	7.81

Unaudited figures