ANNUAL REPORT 2016 SWATCH GROUP / ANNUAL REPORT / 2016 “EMBRACE THE FANTASY AND IMAGINATION OF YOUR CHILDHOOD !” > NICOLAS G. HAYEK, 1993 ALEX (8) COVER: ANNA LYNN (5) SWATCH GROUP / ANNUAL REPORT / 2016 > 1 > CONTENTS CONTENTS Message from the Chair 2 Operational Organization 4 Organization and Distribution in the World 5 Organs of Swatch Group 6 Board of Directors 6 Executive Group Management Board 8 Extended Group Management Board 9 Development of Swatch Group 10 Art & Philanthropy 11 Big Brands 19 Watches and Jewelry 20 – 84 Retailing and Presence 85 – 90 Production 91 Electronic Systems 101 Corporate, Belenos 107 Swatch Group in the World 115 Governance 141 Environmental Policy 142 Social Policy 148 Corporate Governance 150 Financial Statements 2016 163 Consolidated Financial Statements 164 Financial Statements of The Swatch Group Ltd 216 Compensation Report 2016 231 Swatch Group’s Annual Report and Compensation Report are published in French, German and English. Pages 1 to 149 are originally published in French and pages 150 to 230, as well as the Compensation Report, in German. These original versions are binding. © The Swatch Group Ltd, 2017 > 2 SWATCH GROUP / ANNUAL REPORT / 2016 > MESSAGE FROM THE CHAIR MESSAGE FROM THE CHAIR Dear Madam, Dear Sir, Dear Fellow Shareholders, Even more than in successful years, it is in the difficult ones that the two key principles guiding all our activities demonstrate their effectiveness: on the one hand, to remain true to the strategic courses we have steered throughout the existence of Swatch Group; and on the other, to act according to a long-term perspective. Among these fundamental strategic courses, several deserve a special mention: – the firm commitment to maintaining jobs throughout this difficult time even in the event of a significant reduction in turnover, or – still more significantly – in the event of a substantial reduction in net profit. We have never, even in hard times, regarded our staff simply as commodities, but as partners fully involved in future results, in innovation and in ensuring that our company thrives. – the firm commitment not to exert negative pressure on our partners and retailers, but rather to continue investing in marketing in order to appeal to our millions of consum- ers all over the world. – the refusal to adhere to an “end of the world” mentality and not to give way to the oft-predominating global catastrophe scenario. – the unshakable confidence in our expertise and the Swiss Made concept, the bedrock of all the fine qualities of our products. Perhaps all of you may remember that these management principles and the desire to focus on the long term are those held by my predecessor in the position that I currently occupy as Chair of the Board of Directors of Swatch Group. Among all the tangible, rational and reasonable steps in the face of difficulties that were constantly suggested and sup- ported by the great man himself, there is one that might give the impression of being a black sheep in the midst of a white herd, namely: “Embrace the imagination of your six- year-old self, the fantasy of your childhood!” A veritable leitmotiv repeated on many occasions was: “You must be able to maintain the spirit of your childhood and continue to believe in Santa Claus. Dare to pursue your ideas, even the crazy ones.” Or: “For years, I have been trying to persuade my colleagues, employees and friends to retain the imag- ination they had as six year-olds throughout their lives.” Not to mention: “The entrepre- neur filled with innovative ideas and imagination is in fact every one of us from the moment of our birth. Remember when we were six year-olds playing in the sand and building sand castles? Our imagination was boundless!” These days, we only believe in Santa Claus in a somewhat distant manner. We have, however, decided to revisit this powerful idea of embracing the spirit of when we were six, the spirit of our childhoods. We have decided to make it the theme of this year’s Annual Report, to reflect upon it and to see how it can open up new perspectives for us in a global environment beset by all sorts of issues, not least of which is terrorism. Significantly, at six years old, you never lose hope: if, when on holiday by the sea, a wave destroys the sand castle you’ve been working on for hours while Mom worked on her tan and Dad was thinking about having a drink, you start all over again. You start over because the result is not the only thing that counts. What matters is the project and carry- ing it through. SWATCH GROUP / ANNUAL REPORT / 2016 > 3 > MESSAGE FROM THE CHAIR At six years old, we have not yet really assimilated that wonderful thing that is such a help in finding direction in life, both professional and private, even if the latter does not always respect it: logic! Simultaneously wonderful and awful because it can be the worst of all strangleholds. A six year-old is at the dawn of the first phase of reasoning, the dawn of rationality. And it is that which constitutes the strength of a six year-old child: he pur- sues his dreams without restraint; he starts building his sand castle filled with optimism; he is not held back by the idea that this tower is absurd where it is located; this wall too weak; this door ridiculous; this moat unviable: he goes for it, and it is up to reality to put him back on the right track. That straight path of reality separating what is possible on the one hand from what is impossible on the other. A path that is often too straight and filled with stones, devoid of trees offering protection from the sun and rain, and very barren for those who prefer the small, romantic, winding lanes of the countryside. This imagination that we must rediscover, keep and use is that which, combined with all our business experience, in conjunction with our in-depth assessments, our informed strategic decisions and our tireless endurance will enable us to return to the brilliant results that were denied us in the 2016 fiscal year. It is this imagination that has enabled us, together with Swatch, to implement ‘the coolest way to pay’ with the Bellamy in China; to relaunch the POP collection; to develop the SISTEM51 Irony; to launch the “Deep Black” at Omega and the new version of the Fifty Fathoms at Blancpain; to dazzle with Harry Winston’s incredible pieces of jewelry; to introduce the ‘Industry 4.0’ concept at ETA and in our production companies; to continue to develop innovative industrializa- tion methods at Renata for watchmaking batteries; and to conceptualize so many other exceptional products created by our company each year. This imagination that we had when we were six is precisely what so many people lack – especially those who have chosen to work in the financial sector. Imagination in an adult is to do with the heart, not the head. And heart is what is required – perhaps more than anything else – of the management of a global industrial company. Net sales of 7553 million Swiss francs for the Group, a decrease of 10.6% in comparison to last year; an operating result of 805 million Swiss francs, equivalent to an operating margin of 10.7% (down 44.5% compared to 2015); net income of 593 million Swiss francs, equivalent to a net margin of 7.9% (down 47.0% compared to the previous year); and equity of 11.1 billion Swiss francs, equivalent to a still very high equity ratio of 84.5%. In view of these disappointing results, and while the first few months of 2017 are encouraging, the Board of Directors of Swatch Group is proposing a dividend of CHF 6.75 per bearer share and CHF 1.35 per registered share. Please note that despite the 47% decrease in net profit from last year, there is only a 10% drop in dividend from that paid in 2016 based on the results from the 2015 fiscal year. Ladies and Gentlemen, Fellow Shareholders, by taking part in the future of our com- pany, you share both the good and the more difficult times with us. I would like to express my warmest thanks to all of you. I also wish to express my gratitude to the Board of Directors, the Executive Group Management Board and the Extended Group Management Board, and to all of our 35 700 colleagues for their unwavering commitment during a year that was particularly filled with hurdles to overcome. Finally, I would like to thank each and every one of you for the trust you have placed in our company. Yours, Nayla Hayek Chair of the Swatch Group Board of Directors > 4 SWATCH GROUP / ANNUAL REPORT / 2016 > OPERATIONAL ORGANIZATION > SWATCH GROUP OPERATIONAL ORGANIZATION as at December 31, 2016 > SWATCH GROUP BRANDS AND COMPANIES > WATCHES > RETAILING > PRODUCTION > ELECTRONIC > CORPORATE SYSTEMS Prestige and Tourbillon Watches EM Microelectronic Swatch Group Luxury Range ETA Research and Breguet Hour Passion Meco Renata Development Harry Winston CHH Microtechnique (Asulab, Moebius, Blancpain Nivarox-FAR Micro Crystal CDNP) Glashütte Original Comadur Jaquet Droz Rubattel et Weyermann Swiss Timing and Belenos Clean Power Léon Hatot MOM Le Prélet ST Sportservice Omega Universo ICB Ingénieurs Manufacture Ruedin Conseils en Brevets High Range Lascor Longines Simon Et Membrez Swatch Group Rado Novi Quality Management Union Glashütte Swatch Group Assembly Swatch Group Middle Range Jewelry Services Tissot Dress Your Body (DYB) (European Balmain Distribution Center, Certina Swatch Group Mido Logistics, Hamilton Swatch Group Calvin Klein IT Services, watches + jewelry Swatch Group Corporate Basic Range Customer Service, Swatch Real Estate Flik Flak Development) Swatch Group