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Swatch Group says Sochi costs, forex rates hit profits

Watchmaking giant Swatch Group said on Tuesday that first-half net profit slid by 11.5 per cent because of the costs of marketing at the Sochi Olympics, and unfavourable exchange rates.

ZURICH: Watchmaking giant Swatch Group said on Tuesday that first-half net profit slid by 11.5 per cent because of the costs of marketing at the Sochi Olympics, and unfavourable exchange rates. "The already overvalued Swiss franc strengthened further against currencies in all of the Group's important sales regions compared to the first half of the previous year," Swatch said.

Net profit fell to 680 million Swiss francs (US$757 million). But sales rose by 8.5 per cent from the equivalent period last year to 4.5 billion Swiss francs at constant exchange rates, Swatch said in a statement.

However, at current exchanges rates, the sales increase was 4.0 per cent, totalling 4.3 billion Swiss francs, the group noted. The strength of the Swiss franc is a recurrent problem for exporters from the Alpine country, who have long made quality their selling point in order to offset currency effects and high labour costs.

Swatch said that it also faced "significant strain" due to a December 29 fire on an electroplating plant -- a key stage in the watchmaking process. "Although the fire was quickly brought under control, extensive damage and an interruption of business occurred in the electroplating department and the downstream watch movement production," it said.

While the clean-up was completed within weeks of the fire, long delivery schedules for replacement machinery meant that the damaged plant could not be rebuilt as planned in the first half of the year. Non-deliveries and delivery delays resulting from the fire dented sales by 200 million Swiss francs, Swatch said, adding that it expected only "minor delays" in watch movement production for the rest of the year.

Swatch, whose stable of brands includes Flik Flak, Tissot and Longines, said that gross sales in its watches and jewellery division rose by 8.8 per cent at constant exchange rates and 4.3 per cent at current rates compared to the previous year. "In local currency, all markets except for a small number of European countries remain on a growth course compared to the very high prior-year figures. This is also the case in China," it said.

"In addition, all brands continued to invest heavily in marketing, particularly Omega during the Olympic Winter Games in Sochi," it added. Marketing investment at the Games had a particular impact on its flagship Omega brand.

Overall, at 830 million Swiss francs, operating profit was 8.8 per cent lower than in the previous year owing to exchange rates and Sochi spending. Swatch said it was confident about its performance over the rest of the year.

SALES IN CHINA IMPROVE

"The outlook for the Group in all regions and segments remains very good and a promising second half of 2014 is expected," it said. "Particularly in the USA and Japan, sales continue their very positive development. Also, the stronger sales trend noticed on the Chinese mainland continues."

It noted that the outlook in Hong Kong -- the Swiss watchmaking sector's top export market -- was affected by "a number of certainties". The currency impact, however, was likely to be "less dramatic" that in the first half, it said.

Some watchmakers and luxury products companies have experienced a sharp fall in sales in China owing to a clampdown there on corruption and ostentatious entertainment and gifts.

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