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CNBC Interview with Swatch Group CEO, Nick Hayek

Below is the transcript of an exclusive interview with CNBC's Geoff Cutmore and Swatch Group CEO, Nick Hayek.

GC: I just want to start by asking you how things are going as you look at current business trends. How do you feel the beginning of 2018 has started? And do you think some of these trends can continue?

NH: Yes for us it's a strong. You know we saw an end of the year that was very strong - double digit growth - and now it continues, so every month is a record month for us. And of course big advantage, the Swiss franc has begun again to be at the levels he has been 3-4 years ago.

GC: Do you think the Swiss franc is going to continue in these trends to weaken?

NH: Listen I hope. But you know with exchange rates and the exchange money and what is happening in the stock market you know it's full of manipulation left and right. But here we are on a more realistic level.

GC: So are you finding that that is beginning to open up new markets for you or is that leading to high volume sales in existing markets? How much how much sensitivity is there to these very modest movements we've seen in the franc?

NH: You know the Swatch Group is a company that has 150 factories in Switzerland. We are doing everything in Switzerland. So of course if the Swiss franc gets so strong we cannot just move prices into countries because the consumer is a local consumer. So you don't care about exchange rates. You have a value of a product and why should this product from one day to another cost you 10, 20, 30 percent more. So we are forced to keep our prices in the high-end luxury, also in the low-end. And then we have the margins that are disappearing and we opted to stay consistent because we are not doing a commodity product. We are doing a product that stays for 10, 20, 30 years. If you buy a fantastical Omega or a Breguet or a Longines or even a Swatch you keep it for years – 10, 20, 30 years - you give it to your children perhaps later on. And that's where we have to be consistent. And that's what happened to us three years ago, or two years ago. We just accepted that we have lower margins and we kept the prices where they are. But of course the retailer is not motivated. Then he gets lower margins also and then he doesn't want to carry the product anymore but the consumer throughout out all this time he continued to buy wonderful emotional watches, Swiss made watches. And that was the problem and this problem is now going away.

GC: So as far as you're concerned you've turned the corner here on the bad days?

NH: It's not that days; it's a little bit less good days. I mean the growth history of the Swiss watch industry is a fantastic success story. It's a success story of industry, of how the lower end has saved the high end and the luxury. I think the United Kingdom would be happy if they still would have an independent Bentley and Rolls-Royce and would not have abandoned the lower end car production and then keep the independence of the high end production. Swatch is a success story that shows an industry can be maintained in a country that is expensive.

GC: Nick, one of the big stories for the luxury sector in the last sort of 12 months or so has been the return of the Chinese consumer. Could you talk a little bit about how significant that story is for Swatch.

NH: It's not a return. He was always there. He just bought in different places. He just changed a little bit his behaviour. He bought sometimes not so much luxury products anymore or high end but he bought the mid-range products and he was never away. Of course he wasn't very motivated to go to France, too many French people there. You have to have some special way to treat foreigners when they come into the country. Ever taken a taxi in Paris? So you know what I'm talking about. But you had all these terrorist attacks that they had so they changed the way they are buying - some stayed at home and then they consume a little bit less but there is no spectacular return of Chinese. We have growth everywhere, from local consumers in the United Kingdom, in the United States, of course also in China. But when you talk about the fantastic Chinese consumer, 1.3 billion people, the middle class. The politics over there have done the right things, they create a middle class. That's what we need, a middle class that can really consume. And that's what's happening and continues. But there was never a Chinese consumer that disappeared. He was always there.

GC: I mean the way that a lot of the media characterized it was that the corruption crackdown that we've seen led by Xi Jinping had resulted in perhaps the consumer moving down the pricing point, or less luxury product being used as gifts. Do you think we're now past that and that ultimately pricing points are going to go up again?

NH: Ah you're way behind. You know what Xi Jinping did? It is very good. Corruption is always bad and it's always bad for the middle class and we need the middle class to grow. And that was important. But of course it had an impact. Of course there was an exaggeration that people gave as gifts expensive products. And then there was an impact. Yes it's true that some people didn't want to show up with golden watches and too expensive because it was not what you should show yourself with. But this has normalized since a long time. What is much more of a problem, or was a problem, is that the perception out there in the world of the consumption was wrong. There was a hysterical approach making the retailer nervous, the department store, the shopping malls. You see this in the United States. They are all scared of stock, as if we would produce fish that after two days you cannot sell them anymore. So you have to sell them at a discounted price. No, watches is a long term value. And if you have stock you'll sell perhaps one day a little bit less but the next day you say double or three times more because it's the same quality product that you have. And this happened there was a psychological reaction going on.

GC: I mean, you know we think of that as an inventory overhang that perhaps holds back sales. But as far as you're concerned that inventory overhang is gone?

NH: an inventory…there was no overhang! Inventory in watches! Take Harry Winston and jewellery. Would you say, these diamonds, Oh my God, we sell a little bit less at some point of time and three months later you sell more that this is a risk, it's an inventory overhang? No! It's logical. The retailer always reacts the same way. You sell throughout the period of time; very good, 10 percent more, 20 percent more, 40 percent more. Then you adjust your inventory to be able to satisfy the consumer because he is there. And then during one month or two months for a reason that can be an earthquake, a political disturbance, you go down and you sell not 40 percent more, only 5 percent more. And then you compare your stock, but you look into the past. You say oh my god I had stock because I was selling 40 percent more. I now I sell only five percent more. I have too much stock. It's not true. You have the good stock or the bad stock. If you have the good stock, no problem because you will have a growth pattern again. And here is interesting, I come to the story of your own stores. In our own stores, independent of Breguet or Blancpain or Omega or Swatch we sold throughout the last three years always more than the year before because we had the stock. But the retailer, he was scared, he didn't order, he listened probably to all these business TV networks who said 'My God, stock is a risk! You have to reduce the stock, you have to reduce the stock!' He reduced the stock and the consumer came didn't find what he wants, and he bought it in our stores. And now they are coming back because they see my God we need this product. We are all working now in our factories day and night to deliver the product because the retailers are catching up. So stock is an opportunity. I agree with you, if you have fish or you have a commodity then a stock can be a risk. But if you have products, long term consumer products that are not commodities, having the right stock is an opportunity. Imagine you can open a store of Harry Winston and I tell you, listen, you can only buy for 1 million pounds stock at Bond Street. You will tell me 'Are you nuts? I would not open that store. I want to buy 10 million of the finest jewellery, diamonds that I can have'. And then I will tell you OK you get 6 million or so. You are happy about it. It's not that this is a risk. It's an opportunity. The one that has more stock of the good product and has a long term value, this is an opportunity. But these analysts have never understood. For them stock is stock.

GC: So as you look at the year ahead here, do you feel that you've got the right mix of product across the brands that you run?

NH: Yes I think nobody can have a better mix of product. We are present in all segments, in the lower, middle, high end, prestige, whatever you want. And that was always a winning solution. The worst is if you have only a penthouse. Have you ever seen a penthouse that can live without the good ground floor and some good floors below? Have you ever seen somebody sells a penthouse and has no ground floor and nothing else? Not possible. There is no penthouse. You need the foundation. This is important in an industry. You need to be present in all the segments. If you make consumer goods and you're an industrial company you need the bases, you need the volumes in the lower market segments. And this gives you the power the money for research and development and innovation and the luxury and high end will profit from it.

GC: As you look at the different geographies that you operate in the Middle East or Asia or Europe or the Americas are you satisfied that all of them are firing on all cylinders at the moment or are there some areas where consumer sentiment is perhaps still a little bit weak? Confidence is not as strong as it might be?

NH: The consumer has no problem. The consumer worldwide wants to consume everywhere. But you have some areas where you have a distribution structure that is not up to date anymore. Let's take the United States. In the United States shopping malls department stores are broke. It's about the less good managed companies in the world. They always fall into Chapter 11. And then you have other countries in Asia where you have department stores shopping malls that are well managed. They give an emotional experience. So for us it's more about the distribution channels. There are some countries that have good distribution channels and some countries that have not good distribution channels. But the consumer has everywhere appetites to buy more products for ??

GC: especially in the Middle East? Can I ask you specifically about that. We were interested in that part of the world given the experience they've come through of some challenging macro issues a debt overhang in Dubai and in some other markets. You feel that that region is now back?

NH: Here again, I have not felt that the region was away. We have always seen a good mix with local consumption and with tourists that are flowing in. Of course impacted by fluctuation of exchange rates. The moment you can buy a watch in another country substantially less expensive the people will buy there and stay low here. But there was no fundamental change in the success or in the consumption model in the Middle East.

GC: Can I ask you about the other channels to market. I mean clearly a lot of those companies that you've talked about they've run into problems because they didn't recognize that you could sell directly to the consumer via the Internet or there were other platforms available. Could you talk a little bit to that and how that's changing your thinking about how you reach your customer?

NH: What I said before about department stores in the United States has nothing to do with e-commerce. It has to do with bad management. Go into a department store and try to be served by the people. You as a consumer you're nothing; nobody comes to approach you, they don't know how to service a consumer. Go to Asia, go to Bangkok in the department store and you know what does it mean to be serviced. The level to sell a fine product to consumer was totally forgotten in the United States. Especially in the U.S. they only sold through discount, like a commodity. 'So what do you want - if you want something I give it 10 percent less or 20 percent less'. So the service level, the way you sell a product to somebody this has not been done in the right way. And also the environment is not appropriate for it. When you look at the department stores in the United States, most of them have not the environment that inspires you to look at the product to take your time, where other people serve you who are specialists, who know what they talk about. No, because they save money. They want to have a bottom line and then they take people that unfortunately are not trained, they are changing a lot. This has happened in the United States, not the e-commerce. The e-commerce is just a comfort level, that people can have an additional service. And why they don't go to the shopping malls and department stores? Because it's no experience, it's poor. You get no service. In Asia it's different. You have e-commerce and you have department stores and shopping malls and they all work together and you take a profit, everybody takes a profit out of it.

GC: So the world's not going to be taken over by Amazon? It's just we've got to make sure that the service levels are better in retail?

NH: Perhaps the world looks once and says - hey, I would think what kind of business model is it if you make 80 billion or hundred billion turnover and you make a miserable one billion of profit? I mean it's nothing; they make 1 percent of profit. I say this is dumping, what they do. This is easy. You distribute everything in hundreds of millions of pieces. You sell it to a discount price. You take the returns back and at the end where is your profit? I don't want to be in an unprofitable situation. You know this is one of the problems. You should not look always at the stock market, the stock market price, at the value of the stock market. You should look at what is the value of the company, what are they doing. Are they creating added value for the people they work with and for the consumer? In a way, yes, they deliver a product. But I bet with you the Chinese are doing better. If I look what Alibaba is doing and all these they are trying to make a service to the consumer and to earn money. And they are fighting actively against fakes. This Amazon is not doing. They refuse to enter into discussion because they have I think 10,000 lawyers that say please 'we at Amazon, we should not enter into anything that that should force us to fight against fakes'. The Chinese are doing it. They fight against it.

GC: Nick, you are in the smartphone, sorry, the smartwatch business. Tell us how that's going, because there's a lot of interest as to whether your unique approach is winning against the rivals.

NH: No, this is nothing to win or not win. I said this since the beginning. And Swatch, in fact has created this. You know the name Swatch is not Swiss watch, it's second watch. The idea of Swatch, and that's why Swatch has this name, is that you are not owning only one watch. You change your watches. If you go to an opera performance, or if you go to sports, if you go to work if you go swimming, if you go to holidays, you change your watches that you have. So people started to own more than one watch. And everything that is creating, that a person doesn't think he buys a watch and he keeps it 30 years or 40 years without changing it, will grow the total market. And that's what happened when the people announced they do smartwatches, which are more consumer electronics because they sell it to a consumer electronics channel (?). When Apple decided to bring the Apple Watch, it was fantastic for us because nobody buys an Apple Watch to keep it all the time on the wrist. You change it; if you do some sports or if you travel you exchange it. And this is the best that can happen. The worst is people who have nothing on the wrist. But when you start to wear something, for whatever reason you will also change and switch to other. So this will make the market grow. And this we have in the watch industry. The market is always growing. And there is space for Apple, there's space for others and there is of course a lot of space for us.

GC: So you're happy with where you are in that in that marketplace?

NK: We are more than happy because I want to make profits and our profits are very good. If you look all these consumer electronics producers, smartwatches or fitness bands – where is the profit? There's no profit. They need to make huge volumes to make one or two percent of profits because a consumer electronics product is already over after six months or 12 months. You'll need the next software, you need the next upgrade. And that's where you are in a commodity cycle. So a watch, a Swiss watch, you don't have to change because of a software adaptation in one year or two years or three years. You keep it. It's accurate and it's a piece of jewelry that you have. A consumer electronics product has to be changed; that's the model to get to the volumes. And this asks for hundreds of millions of investments that you have to amortize within one year. Why do you think Swatch Group is producing 100 percent in Switzerland? Why these big rich companies are producing in China? Because they have to amortize the production within one year, because then you have to sell off all your stock here. And I'm in agreement, the stock you have to get rid of and then you'll have to launch a new product. This is consumer electronics. Never go into consumer electronics if you talk about a watch.

GC: Nick, as we wrap up I just want to ask you about any issues that are potential headwinds for the business and one that I would particularly like your opinion on is whether Donald Trump's threatened trade war with China could ultimately blow out of control and have an impact on your trade.

NH: We don't do a trade. We do unique products and we have brands and you know we have a lot of problems. There's the luxury tax that we have in China since many many years. This is what we face everywhere in the world. But we are a unique industry. For the Swiss watch industry these barriers are no problem because the people desire a fine Swiss made watch. Again, it's not a commodity it's hundreds of years old brands that are very innovative. So we see no issue at all. However I agree with you, I'm a bit preoccupied to see the world falling apart because everybody thinks everything is instant and everybody forgets about that long term means - let's look at wait one year, two years, three years, before you make any conclusions. But when I look around, especially in business and in politics, my God, the things change from day to day. You had a view like this, you have to change it the other day, you have to change again the other day. So let's think a little bit long term again and let's accept that sometimes a little bit less good times and sometimes there are better times. But don't change the strategy because of this. If you do it you had no strategy.

ENDS

For more information contact Jonathan Millman, EMEA Communications Executive: Jonathan.Millman@cnbc.com

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