Warning! This publication is not recommended for the acrobats and jugglers in today’s financial circus. Annual Report 2008 Swatch Group > Annual Report 2008 Contents Message from the Chairman 2 Operational Organization 6 Organization and Distribution 7 Organs of the Group 8 Board of Directors 8 Executive Group Management Board and Extended Group Management Board 10 Development of the Group 12 Big Brands 13 Watches and Jewelry 14 Retailing and Landmarks 80 Production 83 Jewelry 84 Watches 86 Electronic Systems 95 Corporate, Belenos 101 Swatch Group in the World 109 Governance 131 Environmental Policy 132 Social Policy 133 Corporate Governance 134 Financial Statements 145 Consolidated Financial Statements 146 Financial Statements of the Holding 206 2 Swatch Group > Annual Report 2008 > Message from the Chairman Message from the Chairman The Annual Report that we Dear co-shareholders, are presenting to you today announces a new record in Ladies and Gentlemen, Swatch Group sales for the year 2008. This increase may appear a modest one at first sight. However it in fact represents substantial growth if you consider the CHF 233 million of losses arising from exchange rates, compared with what these rates were in 2007. To this should be added the loss of turnover due to the sale of two production companies of automobile parts, Michel Präzisionstechnik and Sokymat Automotive. These sales were decided by the Swatch Group in 2007, as these companies were not part of our core area of business. This year of 2008 has been one full of contradictions and events, some of them milestones, certain extremely negative and others positive. The year started with a fantastic increase in customer demand for watches of brands from our group, both for those of High Prestige, and for those of the lower price range, particularly those of Swatch itself. Our production factories were insufficient to meet the demands that came as much from customers of finished watches from around the world as from our customers of the Swiss watchmaking industry, dependant for their watches on our deliveries of finished movements, as well as diverse other components and products. 2008 therefore had started most auspiciously and in a sunny climate. Swatch blew out its 25 candles at a magnificent event where again the sun and good humor reigned. On the horizon we could already see some dark clouds forming but they still seemed a long way off and above all very localized. However these clouds became more distinct and the financial economic sky of America suddenly darkened. Little by little these clouds formed into a veritable hurricane approaching with frightening speed, a gigantic roll of thunder whose mighty bolt struck, also touching our major banks, in particular UBS and Credit Suisse. The populations and governments of the whole world were affected with a brutal and massive impact unimaginable before this disaster. Fortunes worth billions and billions of Swiss francs were destroyed … like a house of cards, the arrogant financial strongholds of some all-powerful dominating banks and other investment funds and Hedge Funds collapsed one after another in front of an incredulous traumatized world … a world that sat and watched the enormous waves that started to roll-over them like a violent financial tsunami. Everyone asked themselves whether it was a bad horror movie or reality. The reality is indeed a sad one … it is that of the dominating financial economy of the stock exchanges, banks, investment funds, “structured” products and important industries, often managed by grasping, greedy, selfish and sometimes dishonest individuals, whose sole driving force is money at any price and whose mentality is the criminal one of “look after number one” and “let the devil Swatch Group > Annual Report 2008 > Message from the Chairman 3 take the hindmost”, without any sense of responsibility towards However, our final profit, after taxes and interest is CHF 838 million their communities. This reality forced almost every government in (that is –17.4% compared to 2007). This difference of the world to rush to stop the rising tide of disaster which threatened CHF 177 million, together with the additional loss on foreign totally to destroy all the financial systems and the flow of monetary exchange of CHF 35 million, comes from the fall in the stock liquidity worldwide. exchange value of some of the investments made by our Finance The consumer, believing himself untouched, suddenly noticed Department; a fall or loss not realized but which legally should not only the enormous losses of the stock exchange, even for shares figure in the accounts at the end of 2008. Already in February 2009 in sound industrial companies, but also the loss, or danger of these accountancy losses have diminished compared with the same loss, of his own savings and above all savings in pension funds; period last year. We are very confident that these investments will reading every day in the press the ever more pessimistic comments, bring us profits in the future. It is for this reason that we have not for example the incredible story of Madoff, the former moralizing opted for the new accountancy rules, which would have enabled head of the NASDAQ, the hypocritical governor of the stock us, from October 2008 onwards, not to account for these amounts exchanges, in particular those of the Anglo-Saxon world. Because in total, which means that our total profit would have been of this, the consumer starts to be more prudent in his major CHF 880 million, that is CHF 42 million more than the published expenditure, for example the purchase of a car. The banks net income (or a fall of –13.3% compared to 2007). themselves having lost extraordinary sums, amounting to billions Given this very positive operational performance and the solid and tens of billions of dollars and Swiss francs, therefore lose balance sheet of the Group, as well as our confidence in the confidence in the other financial institutions and refuse to improvement of the markets during 2009, the Board of Directors grant credit to anyone; this includes the watch industry, where decided to propose to the General Meeting to maintain the dividend the wholesalers and the boutique owners selling watches and at the same level as in the previous year, that is CHF 4.25 per bearer jewelry need to have a certain liquidity during the months of share and CHF 0.85 per registered share. September and October so as to be able to order the necessary products for their end of year sales, which alone represent between A number of important investments were undertaken during 2008, 35 and 45% of their yearly turnover. All these factors brought in particular: together resulted, as of the months of November and December, – Montres Breguet: patronage for the restoration of the Petit in a perceptible fall in sales, leading not only to an abrupt halt in Trianon of Marie-Antoinette’s Estate in Versailles. growth but also a decrease in turnover compared with the same two – Glashütte Original: The Glashütte Museum in Germany. months in 2007. – Nivarox-FAR: the start of construction work for an additional In spite of all of this, the directors at the Swatch Group managed factory with numerous new technical installations in Fontaines to weather this gigantic and monstrous storm with wisdom and (Neuchâtel). courage. Our product strategy also helped. We decided for example, – EM Microelectronic: increase in the production area and at the end of 2006 / beginning of 2007, to concentrate still further on restoration of the buildings in Marin (Neuchâtel). our core products, that is watches, jewelry and diverse accessories. – EM Microelectronic: continuation of the construction program Thus we wanted to sell-off the industrial sub-contracting entities, of a new production line for 8 inch wafers and the start of in the form of several producers of automobile parts, and realized production in Marin (Neuchâtel). this sale in 2008. – Favre et Perret: a new factory for our producer of luxury watch With our own boutiques having increased in number and size, cases in precious metals (in its completion stage) at Le Crêt-du- we were able to absorb a substantial part of the drop in sales of Locle (Neuchâtel). the last months of the year. The end customer in our own – Tiffany & Co: new product development and the purchase of boutiques did not reduce his purchases and, in the majority a building and its substantial surrounding grounds in Biel. of countries, even increased them. This acted as a striking Purchased from the Town of Biel with ratification by a public vote endorsement of our distribution strategy of the last few years. in 2008 to become definitive at the beginning of 2009. Important new products of our brands also completed our – Omega: official timekeeper of the Beijing Olympic Games 2008. defense mechanism against the loss of turnover occasioned by the – Dress Your Body: inauguration of the beautiful new production financial system. site in Cormondrèche (Neuchâtel). The list of bad surprises was also extended by the losses through – Swatch Group: the next stage in a vast program of boutique foreign exchange rates compared with those same exchange rates openings in the best locations in cities around the world: Breguet, in 2007, amounting to CHF 233 million in 2008 on a turnover Blancpain, Omega, Swatch, Jaquet Droz, Léon Hatot, Tourbillon, which otherwise would have risen to CHF 6.2 billion. In spite of and Equation du Temps, to name but a few. this, the total growth between 2007 and 2008 is significant and our operational results, with CHF 1.2 billion (that is –2.7% compared to 2007), are therefore substantial. 4 Swatch Group > Annual Report 2008 > Message from the Chairman Swatch Group > Annual Report 2008 > Message from the Chairman 5 Our shares lost 57% of their value during 2008, without any real In addition 2009 starts out with a giant new hope of improvement for justification, like many other shares of excellent companies quoted all nations arising from the change in government of the dominating on the stock exchange.