contents contents 2 4 5 6 message from operational organization organization & distribution organs of the group the chairman 10 11 47 48 50 development of know-how retailing jewelry production production of watch, the swatch group movements and components 57 63 69 93 94 electronic systems general services swatch group social policy safety and environment international 96 107 108 148 corporate governance financial statements consolidated financial financial statements poster – world leader statements of the holding in watchmaking swatch group annual report 2004 1 message from the chairman message from the chairman Ladies and Gentlemen, Shareholders, Another year has come to an end. 2004 was in fact a very good year for the Swatch Group despite some major obstacles, the first of which was – and I’m sorry to have to mention it yet again – the problem of the Swiss franc, which con- tinues to rise at a staggering rate compared with all other currencies except the euro and the pound sterling. This is causing serious problems for all of Switzer- land apart from some sections of the financial community. Some of the air of stagnation and resignation, which we see in many of our political leaders, is beginning to spread right across the country. The collapse of Swissair-Swiss then Swiss-Lufthansa is one upsetting and depressing example of this. In fact, I am outraged that in Switzerland, the land of some great business founders of the past, we are no longer able to find enough entrepreneurs capable of preserving and developing the heritage that has been handed down to us, and of which we are the guardians. To this note of stagnation, one has to add the immense monetary shackle represented by the ever-increasing value of the Swiss franc, which each year costs all of us hundreds of billions of francs, and costs the Swatch Group hundreds of millions of francs. The other major obstacle is the European Union, or Europe, as it now likes to call itself, which has kept none of the enticing promises it made in the economic sec- tor. We were promised that, with its 300 million plus consumers, we would expe- rience a completely unprecedented economic upsurge that would raise the stan- dard of living for all of Europe. However, economic stagnation and even decline have plunged Germany – previously the powerhouse of Europe and even the world, but today a shadow of its former economic self – France, Italy and practi- cally all of the major European countries into a real recession, which is obviously affecting our watchmaking exports. Not only those exports, but all our exports, and our tourism too. Despite all this, Europe is still an economic superpower and, very pleasingly, also a civil, peace-loving, cultural and democratic one. Even mired in its current recession, this superpower is able unashamedly to pit itself economically against the United States which, moreover, is also a military superpower. Nevertheless, Europe is beginning to choke under the mass production of standards, laws, rules and regulations. These measures are not only impeding all the individual initiatives of entrepreneurs in Europe, but are also frequently putting consumers out of work, even though they were originally intended to protect them. And I am well placed to confirm the existence of such obstacles, since I am a member of the temporary committee of the High Level Group in Brussels that is working to draw up recommendations aimed at avoiding the excessive transfer of jobs out of Europe and attempting to overcome the huge and ever-increasing problem of unemployment. It is up to us, the true entrepreneurs of all countries, to overcome this situation, and it is our duty to recreate the economic development that our countries need. Despite all this the Swatch Group, which is led, as has often been said, not by managers but by male and female entrepreneurs, ended 2004 strongly. Moreover, 2005 promises to be good too, judging by the results of the first few months. In 2004, sales increased to CHF 4152 million, up 6.2% on the previous year in constant currency, and up 4.7% in Swiss francs. The effects of exchange rates impacted this sales result to the tune of CHF 60 million, of which CHF 56 million related to a negative influence on the conversion of sales carried out in foreign currencies during the second half of 2004. The operating result was CHF 651 mil- lion, an increase of 9.6%, and represented 15.7% of sales (15.0% last year). The net income of the Group was CHF 512 million, or 12.3% of sales, representing an increase of 4.1% on the previous year. The shareholders’ equity in the Group rose to CHF 4261 million at the end of 2004, representing 70.9% of the balance sheet total. Average return on equity in 2004 rose to 12.4%. Based on these very solid and highly encouraging figures the Board of Directors will propose, at the 2 swatch group annual report 2004 message from the chairman dynamic message to the world remains as strongly influential as it has been over the last few years. On this note, and on behalf of the Board of Directors, the Management Board and all our employees, who have again contributed enormously to the success of the past year, I would like to thank you for your loyalty and support. Sincerely, Nicolas G. Hayek Chairman and Delegate of the Board of Directors of the Swatch Group. Annual General Meeting of Shareholders, an increase in the dividend of 21%, to CHF 1.75 per bearer share (CHF 1.45 last year), and CHF 0.35 per registered share (CHF 0.29 last year). Moreover, it will proceed with the repurchase of shares total- ing in the order of CHF 250 million via a second trading line. These positive figures reflect several facts: • Firstly, in addition to its number 1 position in horology, the Swatch Group has also become the number 1 prestige watch manufacturer, both in terms of value and volume. Besides this double number one position of the Group, Breguet also occupies the pole position amongst luxury watch brands, with very strong growth. Having resolved its logistics problems dating from the end of the 1990s, Blancpain has made very rapid progress, as have Glashütte Original, Jaquet Droz, Léon Hatot and Omega’s luxury sector. • Secondly, Omega is recording very strong growth, winning a very appreciable market share. • Thirdly, demand is very strong for the Group’s other brands, not only in the world of fashion with ck watch and the world of elegance with Longines, but also for the Rado, Tissot and Swatch brands. Each one of the Group’s watch- making brands has inspired a burst of energy and dynamism, both within the Group and also outside it. NICOLAS G. HAYEK, FREEMAN OF THE CITY OF BIEL With the members of his Management Board, Nick Hayek has already initiated To tumultuous applause, Nicolas G. Hayek was declared a freeman of the City this dynamic upsurge in several of the Group’s key countries, in Asia – notably in of Biel on February 19, 2005 by Mayor Hans Stöckli, who thanked him for Japan and South Korea – in the United States, in the countries of the Middle having made Biel the «world capital of watchmaking». Visibly moved, N. G. East, and in many other major regions of the globe. And all this input is starting Hayek received a bouquet of flowers from a surprise guest, the President of to bear fruit today. The market share in jewelry and the sound mastery of the Swiss Confederation Samuel Schmid, who was there to testify to the grat- expertise have increased spectacularly at Swatch and ck jewelry. The same itude of the entire country towards the «savior of the Swiss watchmaking applies at Breguet, Omega and Léon Hatot. This is also due to the concentration industry». of development, production and expertise at Dress Your Body (DYB), which has become the number 1 in its field in Switzerland. All these factors herald a very strong upsurge in 2005 and the years to follow, in all fields of business. You only have to look at the investments that have been approved, both for the construction of several new factories in Switzerland and for prestigious new points of sale in the center of major cities such as Tokyo, New York, Paris, Milan, Berlin, London, Shanghai, Beijing, Singapore, Hong Kong and many others besides. This should enable your Group both to put more distance between itself as world number 1 and its closest competitors, and to assume leadership in the new areas that we have recently opened up. I am saddened – and at the same time a bit proud – to note that the Swatch Group has become Switzerland’s most respected and best-known economic ambassador abroad following the demise of Swissair-Swiss and other Swiss brands, which has cost us much in the way of prestige. But I can assure you that the Swatch Group will do everything in its power to ensure that Switzerland’s swatch group annual report 2004 3 organization OPERATIONAL ORGANIZATION (as at December 31, 2004) WATCHES PRESTIGE AND LUXURY RANGE Breguet Blancpain Glashütte Original Jaquet Droz Léon Hatot Omega HIGH RANGE Longines Rado Union MIDDLE RANGE Tissot ck watch & jewelry Balmain Hamilton Certina Mido BASIC RANGE PRIVATE LABEL RETAILING DISTRIBUTION Swatch Group Swatch Group Les Boutiques Distribution Tech Airport Swatch Flik Flak Endura PRODUCTION ELECTRONIC SYSTEMS GENERAL SERVICES WATCHES, MOVEMENTS AND COMPONENTS EM Microelectronic-Marin, Micro Crystal, Asulab, CDNP, Swiss Timing, ICB, Renata, Microcomponents, Swatch Group Real Estate, Swatch Group ETA, Frédéric Piguet, Valdar, Nivarox-FAR, Sokymat Automotive, Oscilloquartz, Internet Lab, Swatch Group Hi-Tech, Rubattel