ANNUAL 2017 REPORT THE EARTH, THE SUN, A YEAR The Earth needs about 365.25 days to complete its gravity-assisted elliptical orbit of the sun. Of course, we generally round this number down and take care of that extra quarter day every four years. Typically, a day consists of 24 hours but we often record its two 12-hour halves. The 8760 hours in Swatch Group’s 2017 were significant. This is their story. SWATCH GROUP / ANNUAL REPORT / 2017 1 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 149 CORPORATE GOVERNANCE 152 FINANCIAL STATEMENTS 2017 165 CONSOLIDATED FINANCIAL STATEMENTS 166 FINANCIAL STATEMENTS OF THE SWATCH GROUP LTD 216 COMPENSATION REPORT 2017 231 PLEIADES Swatch Group’s Annual Report and The Pleiades are an open star cluster in the Compensation Report are published in constellation Taurus. They are part of the French, German and English. Milky Way and can be seen from Earth with Pages 1 to 151 are originally published in the naked eye. Its name connects it not only French and pages 152 to 230, as well as the to the nymphs in Greek mythology, but also Compensation Report, in German. to a group of sixteenth-century French poets. These original versions are binding. Whether in the sky or in a book: the Pleaides have real radiance. © The Swatch Group Ltd, 2018 SWATCH GROUP / ANNUAL REPORT / 2017 CONTENTS 2 MESSAGE FROM THE CHAIR Dear Madam, Dear Sir, Work is what all those involved in our Group do on a daily basis, Dear Fellow Shareholders, from the members of the Board of Directors to the senior management to the engineers, the sales force, the IT specialists, the marketing and The black hole – the beginning or the PR teams, the financial and controlling professionals, all the way to the end!! employees working in production at the various companies, and many Stars, galaxies, universes. Astronomy, the more. I could go on but it would be impossible to list them all. A total of world’s first time measurement system and 35 400 people give their all every day to keep Swatch Group on the road connected with so many other sciences. to success. Who has never stared up at the starry sky Joy is what our teams experience when, for example, they create a on a clear summer’s night and let their dreams new product. Consider the beauty of Harry Winston jewelry creations run wild? Who has never made a wish upon a and the satisfaction of those who conceive, design and craft them. shooting star? Let’s be honest: now and then, Think of the Breguet watchmakers who develop a masterpiece like the a little irrationality doesn’t hurt. But only if Marine Equation Marchante 5887; the creative talents at Swatch we keep in mind that we forge our own desti- launching a new SKIN model; the employees at Omega who celebrated nies and remember that happiness does not the 60th anniversary of the Speedmaster; or Blancpain’s commitment fall from the sky. A small glimpse of this uni- to protecting millions of square meters of ocean and underwater life; verse can be found in our Annual Report 2017! the teams that give everything for our brands in different regions Along with a special Swatch, which again was around the world. That is what work and joy is all about! made just for you, this time with the unique Nevertheless, we should not forget our motto: to embrace and pre- Swiss cow constellation in the Milky Way. serve the fantasy that we had as six year olds, even though work and On a more serious note, Western philoso- joy are the essential factors for our success. phy has always revolved around this issue of What determines the time we measure using our products, if not destiny. Is the future determined in advance our planet’s movement around the sun, our nearest star? Products are or not? Are human beings free or are they sometimes acquired for their beauty, sometimes for their precision, not? Philosophers have filled huge and chal- and not unusually for the obsession to “correctly” measure the time the lenging books on this topic, some of which tell earth takes to complete a full revolution on its axis as well as to turn us that we are free and that our fate is in our around the sun. Perpetual calendars, equation of time measurements, own hands, while others take the opposite tourbillons, Co-Axial escapements: all are attempts to house within a view, proclaiming that we are not at all free tiny yet reliable mechanical movement something that faithfully and that everything is preordained. Some matches the movements of the Earth. Several of our brands have a spe- even combine the two approaches. cial affection for moon phase complications, but Blancpain is the un- But now to the fate of Swatch Group in surpassed master. Is the moon phase not a poetic means of carrying 2017. There were various elements that con- with us the romantic face of our somewhat mysterious natural satel- tributed to the success such as, of course, the lite, which is believed to play a considerable yet largely unknown role work we do and the joy that it brings. in our lives? This Moon radiates a very special glow at Omega, whose watches were worn by the only 12 human beings who had the privilege of setting foot on its surface. It is also Omega that has paid tribute, through one of its most prestigious collections, to the constellations that are believed to influence our future from the time of our birth. For me, there is not only the work, the joy, the success, and the fig- ures, but also the pride I feel, as Chair of the Board of Directors of Swatch Group, to be able to report on a successful year in 2017 and to look forward to 2018. You see, I still have much of the fantasy of a six year old and am still looking to the sky for shooting stars upon which I can make my wishes! Head in the clouds, definitely… but feet firmly on the ground! SWATCH GROUP / ANNUAL REPORT / 2017 MESSAGE FROM THE CHAIR 3 Allow me to run through the 2017 results for a moment. In the breakdown of the year, I would like to highlight certain elements: – Not only did the Watch & Jewelry segment (excluding Production) post 6.9% annual sales growth at the current exchange rates, the oper- ating margin of this same segment grew by 27.4%. – What is even more interesting in my opinion is the fact that growth reached 12.2% in the second half of the year and even 14.9% in the fourth quarter – an acceleration fully confirmed in December with the second-best monthly sales in the history of Swatch Group! This gratifying news has likely long been written in the stars… In 2017, our group achieved net sales of 7960 million Swiss francs, up 5.4% compared with the previous year and despite the negative effects of current exchange rates. The overall operating result improved by 24.5% to 1002 million Swiss francs, while the operating margin grew from 10.7% in the previous year to 12.6%. Consolidated net profit increased by 27.3% to 755 million Swiss francs, with a net margin of 9.5%, a significant improvement over the previous year (7.9%). Given these encouraging re- sults, the Swatch Group Board of Directors’ dividend proposal is CHF 7.50 per bearer share and CHF 1.50 per registered share, which marks a re- turn to the level achieved in 2015, which was a highly successful year. Dear Madam, Dear Sir, Dear Fellow Shareholders, for helping shape the destiny of our company and thus avoiding leaving it to the stars alone; for accepting the eclipses that make everything seem threaten- ingly dark; and for remaining optimistic with regard to the famous black holes that could swallow up everything but are fortunately a long, long way off, you remain the living soul of our company. I wish to thank each and every one of you from the bottom of my heart. My sin- cere gratitude also goes to the Board of Directors, to the Executive Group Management Board and to the Extended Group Management Board, as well as to the 35 400 colleagues for their unfailing commit- TIME AND SPACE ment over the past year. Sincere thanks to all of you. Time flies: in 1996, the Swiss astronaut Yours, Claude Nicollier took this watch into space – proving that there are no limits for Swatch. The same could be said for the Roman god Mercury. Not only did this “messenger of the gods” with the winged helmet bring the news, he was also the god of merchants. Nayla Hayek You might even think of him as the patron Chair of the Swatch Group Board of Directors saint of annual reports. SWATCH GROUP / ANNUAL REPORT / 2017 MESSAGE FROM THE CHAIR 4 SWATCH GROUP OPERATIONAL ORGANIZATION as at December 31, 2017 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, CDNP) Blancpain Nivarox-FAR Micro Crystal Glashütte Original Comadur Belenos Clean Power Jaquet Droz Rubattel et Weyermann Swiss Timing and Léon Hatot MOM Le Prélet ST Sportservice ICB Ingénieurs Omega Universo Conseils en Brevets Manufacture Ruedin High Range Lascor Swatch Group Longines Simon Et Membrez Quality Management Rado Novi Union Glashütte Swatch