Annual Report

Annual reports and statements




Chairman’s Statement


DEAR FELLOW SHAREHOLDERS,

For the financial year ended 31st March 2009, the Group posted a 57% drop in net profit after tax to $13.4 million on a 10% decrease in revenue to $439.9 million. On both counts, the performance was appreciably off the stellar results posted over the corresponding year.

A principal contributor to this weaker-than-expected profitability was a one-off, non-cash, impairment loss of $14.1 million in the investment in Gems TV Holdings Ltd, a company listed on the Singapore Exchange. With this impairment charge, it is unlikely that this investment will have a further negative impact on the Company’s profitability. Excluding this one time charge, net profit after tax from continuing operations would have declined by just 13% to $27.5 million. Nonetheless, this result has blemished our streak of 25 quarters of profitable growth recorded over the past six and a half years.

Despite these challenging economic conditions, the Group continued to strengthen its balance sheet liquidity, generating $16.4 million of free cash flow for the year with the Group’s cash and cash equivalents increasing from $28.8 million a year earlier to $42.1 million. Although group inventory was reduced by 4% to $146.0 million, this result is considered far from satisfactory as it did not keep up with the pace of sales declines. Our debt-to equity ratio remains at a conservative 8.5% and overall, the consolidated net assets increased by $13.6 million to $182.9 million; or 78.86 cents per ordinary share.

Following this year of performance contraction, the Board of Directors recommends a first and final dividend of 2.50 cents per share amounting to a net disbursement of $5.8 million.

BUSINESS REVIEW

What a stark contrast a year can be. During the past twelve months, the world’s economies have been in precipitous decline and few industries have been spared from this financial avalanche. The Swiss watch industry is no exception as it faces its most perilous crisis since the quartz revolution of the 1970s. This time around, technological innovation is not the essence of the problem – credit and capacity are.

Decades of under-investment in production facilities and capital equipment had led to an imbalance between the supply and demand of luxury and specialty watches, especially on the back of easy credit, rising global equities and appreciating asset prices over the past five years. Consumers, especially in the newly emerging markets of East Asia and Eastern Europe had been increasing their wealth by the millions and many were prepared to spend a greater proportion of it on luxury goods, and in particular, watches.

Accordingly, brand owners and manufactures responded to this emerging super cycle in watch consumption by embarking on ambitious capacity expansion programmes to play catch up with demand predicated on vertiginous top-line trajectories. And what were once considered healthy production bottlenecks, very rapidly turned into huge albatrosses around their necks.

They are not the only ones at fault. In part, they were cheered on by supremely confident distributors and retailers who far too often, were either ordering or pushed into ordering much more product than they required as a means to secure a higher share of the production output. This “game” carried on year after year and continued right through to the annual watch fairs in April 2008 where many in the industry still believed that the crisis would not impair demand in this particular sector; and sure enough, the majority of the watch brands booked record orders at those fairs. As late as August 2008, a local industry veteran publicly predicted that growth would continue at a rate of 10-15% per annum for the next five years. Our Annual Report that year can attest that this was a view we clearly did not share at The Hour Glass.

In October 2008, Lehman Brothers collapsed. There was a knee jerk reaction by consumers, retailers and distributors alike which resulted in purchasing coming to an abrupt halt. Suddenly, the only thing channel merchants wanted to do was to de-stock. But de-stocking in a market of declining demand is extremely challenging and arguably, several months on, the industry is learning to live with this new paradigm.

OUTLOOK

That the luxury goods industry is bullet-proof to any form of economic contraction is all but a myth. This industry relies largely on a feel good factor, the wealth effect extended by surging stock markets and a rising property market. The fast and heavy flow of easy money has disappeared and its return is not foreseeable in the near to mid term. Watch buyers are clearly under stress as this crisis has disproportionately affected the rich, with many pools of clients especially from the financial sector evaporating overnight. It would be an understatement to declare that the go-go days of the industry are all but over for now and with a chronic lack of visibility in the global economy; we believe that the luxury and specialty watch retail business may continue to experience at least another 3 to 4 successive quarters of sales and margin deterioration, perhaps even longer. Export statistics released by the Federation Horlogerie Suisse, the governing body responsible for the Swiss watch industry, points to a record 24.3% decline in Swiss watch exports from January to April 2009 with many of the major watch markets such as Japan and the United States recording drops of 25% to 42%. Singapore fared no better with Swiss watch imports in that period declining by 36.5%.

We are already seeing extreme casualties emerging from this economic war against excess and credit. In Switzerland, a handful of smaller, new-to-market brands and component manufacturers are shuttering their workshops whilst others are seeking bankruptcy protection. Even larger, more established manufacturers are rightsizing their operations and many putting their factories on two to three day work weeks. Recent announcements by major watch producers point to year on year sales contractions of up to 25% for the month of April 2009 because of declining wholesale activity as their retail partners continue to crimp purchasing. In the retail distribution channels, one of East Asia’s largest watch companies has already fallen into receivership and is in the process of being liquidated. In Japan, several of its oldest watch businesses have declared bankruptcy with others soon to follow. One must note that these same Japanese watch companies survived two world wars and the bursting of the Japanese bubble in 1990 but were not as fortunate in this Great Recession.

Against this backdrop, it is no surprise that neither growth, nor recovery, is in our management’s vocabulary. It is also highly probable that even after having experienced this 10% decline in revenues, the Group may continue to face sales and margin contractions in the new financial year till consumer sentiment and confidence improves and the global inventory overhang is cleared.

Whatever the outcome will be and whatever the evolving paradigms and operating environments that The Hour Glass will exist in, one thing is clear. The Hour Glass will survive this episode and will emerge a far stronger company and organisation. At a time when industry consensus was to purchase more merchandise, as early as April 2008, management prudently reduced its forward orders, began the process of de-stocking and raising our cash hoard. This meant that we were containing and reducing inventory in what was still considered a buoyant market and that allowed us to accelerate the process of cash generation.

By acting early, it has placed us in an extremely favourable position to continue with market development efforts such as enhancing our premium retail network and brand portfolio. This includes the addition of two new stores in Singapore – namely a 1,200 sqft multi-brand concept store “L’Atelier” and a 1,200 sqft standalone Rolex mono-brand boutique at the soon to open luxury shopping centre ION Orchard plus, the relocation of a 1,000 sqft multi-brand store from Peninsula Plaza to Orchard Central in Singapore. L’Atelier is envisioned to set a new watermark in the world’s specialty watch retail landscape with its unique merchandising philosophy and client service offering. We have been working on this project for over two years now and are excited with the prospect of its opening. The Hour Glass has also been fortunate to have been approached by more brands than it can accommodate, seeking to develop new business partnerships and extend existing ones. One such brand is A. Lange & S hne and we are delighted to announce our new collaboration for the Singapore market.

Notwithstanding, in the face of abundant opportunities we are realistic in acknowledging that we have limited resources and will remain prudent and selective in our merchandising approach; engaging only if we determine that our objectives are aligned with the brand owner and its management, and that the cash returns from the brand will be attractive and sustainable in the long term. This is particularly the case with our continued emphasis in building ever strong relationships with our independent partner brands – Patek Philippe and Rolex. These are partners who have proven over multiple decades their timeless values – emphasis on product integrity and unwavering commitment towards market leadership. Values which we understand, appreciate and admire.

The Hour Glass is also prepared to consolidate in order to grow. We will continue to shed yield deficient brands and under-performing business units from our portfolio, build our cash reserves and prepare ourselves for a period of compression and protracted economic recovery. To this end, we recently transferred back the distribution of the Gerald Genta and Daniel Roth brand in Hong Kong over to the Bulgari Group as we continue to focus on our specialty watch retail business.

Whilst doing all this, we will push forward with our organisational development initiatives by recruiting and training the next generation of leaders. I had previously expressed that this was one of our long term objectives because in this business, it takes approximately five to seven years of on-the-job training to prepare an individual for a middle management retail position. I am delighted to report that our senior managers and officers have already begun rooting out potential talent and this process of rejuvenation and renewal is well underway. We place a lot of emphasis on creating a strong and disciplined team dynamic and we are proud of the fact that in the industry, The Hour Glass is not known as an organisation with a handful of champion sales people but rather, as an organisation backed by a championship team.

It goes without saying that all this would not have been possible without the appropriate corporate soul in place and it pleases me that 30 years after our inception, The Hour Glass’ culture of familial care still resonates deeply within the organisation. At our recent annual dinner, we conducted an auction of donated items and appealed for outright cash donations in order to raise funds for The Hour Glass Fund to aid the families of our employees that may have fallen on hard times. In a span of one hour, we raised $150,000 from directors, management and staff. The sense of generosity and desire to help made it a remarkably heart warming experience. As this project is still in its infancy, I will no doubt provide updates of it in the next Chairman’s Statement.

ACKNOWLEDGEMENTS

On behalf of the Board of Directors, I would like to thank our 310 associates around the region for their dedication and drive. I am proud of our team for their sense of urgency, for having the gumption and tenacity to seize this crisis by the horns, committing to see the Group through this period of uncertainty and even going as far as voluntarily foregoing annual salary increases to ensure the Group’s survival. For that, I would like to reciprocate by ensuring that we will do whatever it takes to defend their jobs and livelihoods.

I would like to take this opportunity to thank Mr Ariel Kor for serving as a Board member. Though he was on the board for only one term, Ariel brought with him several fresh perspectives on the business and we wish him well with his relocation from London to Jerusalem.

In closing, I extend our gratitude to our clients, brand partners, business associates and shareholders for their ongoing support and trust for without which, the past thirty years would have been peppered with a much stonier path. I am certain that though the leadership of The Hour Glass will continue to be challenged in the decades to come, the foundations we have laid and the institution we have built will ensure that the Group will continue to progress and prosper as the watch world’s leading cultural retail enterprise.

Henry Tay Yun Chwan
Executive Chairman
1 June 2009

We’re here to help


Loading Consult A Specialist Form

Change Country

Select your country:

Share

Share via:

To find out more about our available positions, please visit our Careers page.