Ermenegildo Zegna N.V. Q4 FY2022 Earnings Call

Hello, everyone, and welcome to the Ermenegildo Zegna Group Full Year 2022 Results. My name is Bruno, and I will be the operator for today. I will now hand over to your host, Francesca Di Pasquantonio. Please go ahead.

Hello, everyone, and thank you for joining us as we share our full year results for 2022. I'm here today with Ermenegildo Zegna, Group Chairman and CEO; as well as our COO and Rodrigo Bazan, CEO of Thom Browne. We have filed today our 20-F form, and we've also filed our customary form, which is the conversion from the previous F1 form. Before we begin, I need to point out that we may make certain forward-looking statements during today's call. Our actual results may be materially different from those expressed or implied by these forward-looking statements. All such statements are subject to a number of risks and uncertainties, including those discussed in our SEC filings. I refer you to the Safe Harbor statement, which is included on Page 2 of today's presentation. And of course, this call will be governed by such language. I'm pleased to now hand over to Gildo.

Thank you, Francesca, and hello to everyone. I'm very happy to share that we ended another strong year. Our results for '22 reflect a strong momentum and desirability of Zegna and Thom Browne brands, as well as the soundness and success of our strategy and execution. Last year, we kicked off the rebranding of Zegna, unveiling the ZEGNA One Brand strategy, which has seen excellent success with customers so far around the world. We are still early in the rebranding journey, and we just launched our second season. We have a number of initiatives to continue building on Zegna's success and reinforce its position as one of the world's top luxury brands and the leader in menswear. Thom Browne continues to show strong performance as well. Besides the numbers, we are very proud of the great reaction Thom Browne received at the Paris and New York shows last year, as well as this year from customers, the media, and influencers. No discussion of our '22 is complete without mentioning our very exciting partnership with the Estée Lauder Companies for the TOM FORD Fashion business. We expect the deal to close in a few weeks, at which time we'll be able to share more about our plans for this top brand. So far, ‘23 has been off to a very encouraging start, with very solid double-digit performance across our retail network for Zegna and Thom Browne. I'm optimistic that the reopening of the Greater China region, combined with the positive response we are seeing from customers to our collection across our global network, particularly European and American customers, will continue to drive our growth this year. We are particularly excited about the progress of our Made to Measure business, which is up double digits compared with 2019, which was already a tough year. We expect that our results for '23 will comfortably show that we are on the trajectory to meet our goal of annual revenues exceeding €2 billion and adjusted EBIT margin of at least 15% by the end of fiscal 2025, excluding the TOM FORD Fashion business. We will continue to execute on our strategy that aims to strengthen our market-leading position and pioneer new high-potential markets like Central Asia, Southeast Asia, and India. We are also, as always, working to strengthen our Made in Italy manufacturing platform with projects aimed at expanding our production capacity in footwear as well as in clothing manufacturing plants, adding 300 people to our Italian workforce by the mid-term. Made in Italy manufacturing remains a priority for us today, 113 years after the foundation of the company. In this regard, I am also proud to remark that we have launched Accademia dei Mestieri, our vocational training project. Accademia will focus on skills and expertise in textile, clothing, and leather goods within the group and is part of our sustainable growth strategy to ensure excellence and innovation in our manufacturing. If you now please turn to Page 4, I think I'd like to turn to some financial highlights of '22, while Gianluca will go more in-depth later in this call. As we disclosed in January, our revenue for the year was almost €1.5 billion, with an increase in constant currency and a 50.5% increase over '21, in line with the mid-teens guidance we've shared. Excluding the Greater China region, which was heavily affected by COVID-19-related restrictions in the second and, in particular, the fourth quarter, our revenue grew 42% in '22 over '21 with strong performances by U.S. and European customers, as well as consumers from the Middle East. Our profit in ‘22 ended at €65.3 million, and adjusted EBIT at €157.7 million, up 6% from the previous year, in line with our guidance of moderate improvement. Adjusted EBIT margin came in at 10.6%, down 90 basis points from '21 due to increased costs and the negative impact of COVID-19 disruption in Greater China, which Gianluca will discuss in more detail, which were partially offset by healthy profitability improvement in other geographies. Our cash surplus at year-end was €122.2 million, down €16 million from '21 but reflecting cash generation in the second half of last year, in line with guidance. Gianluca will give you more details on this point later on as well. Now please turn to Page 5. Looking at our journey over the last three years, '22 showed continued sales growth and healthy profitability even as the global environment continued to be uncertain, and as Greater China was hit with temporary store closures due to COVID-19-related restrictions. As I said earlier, we are seeing the reopening in Greater China, which already has a positive impact on '23, and we believe this will continue for the rest of the year. Now please turn to Slide 6. I'd like to talk about some highlights for last year. As I mentioned, the Zegna One Brand has proven successful with our customers since we launched it in July of last year. We see increased demand for our iconic products, especially footwear and luxury leisurewear, that continues to perform very well, proving the soundness of our decision to focus on luxury leisurewear as a pillar of our Zegna business. Meanwhile, we are also seeing a continued rebound in formalwear, in line with the return to offices and the uptick in demand for menswear for social and special occasions, particularly evening wear. Our relationship with our customers is one of the strongest drivers of our success, and we have always prided ourselves on providing excellent customization in the product and service. Our CRM is becoming more sophisticated. Last year, our direct customer engagement was responsible for driving 35% of the revenue of our boutiques worldwide. Our proprietary Clienteling application, which we have renamed Zegna X, is continuing to see an accelerated rollout, and this provides an exciting new channel for us to strengthen this relationship. As of today, the business generated through this outreach approach reached 50% of our boutique revenue, ahead of the target set two years prior; outreach represents a powerful tool to set demand and capitalize on the increasing popularity of our collection and iconic products. Thom Browne also had a number of milestones last year. The brand added 11 net new directly operated stores around the world, bringing the total to 63 stores and 105 points of sale. Rodrigo will now give you some color on Thom Browne now. Thank you. Rodrigo, go ahead.

Thank you, Gildo. Similar to the world of Zegna, although we come from different histories, backgrounds, and years in the market, we share an equally important customer centricity at Thom Browne. We continue to strengthen our client value management program, which is the key tool we are looking to expand: not only for our exceptional high-level clients, but also for the additional new visitors to the brand that make significant initial purchases, as well as walk-ins and initial transactions. Our main goals going forward are two: one is a big expansion of awareness, and secondly, a significant expansion of our client base. To support that, we believe we have an exceptional product and exceptional clients, and we must have an exceptional tool suite. We are completing the rollout of the sales force tool for clienteling marketing and customer service at the end of this month. We will have a similar solution for China later in the year, as well as for Korea as soon as we take over the business in July. As the brand continues to grow and consolidate expenses, we are also keeping our marketing investment to significantly expand our customer base. We have been extremely pleased with the reception of our shows, both in New York and Paris, over the past nine months. Starting this summer, we'll be celebrating 20 years of Thom Browne, which allows us to have a fantastic opportunity to celebrate globally with events, including Thom in different parts of the world over the following 12 months. And with this, I would just like to pass back to Gildo Zegna.

Yes. Thank you, Rodrigo. I must add that '22 also saw a continual journey of caring for our employees, the environment, and the world around us. People were a key theme during '22. We are keeping up with the commitments we announced at our Capital Markets Day in May, developing a number of DE&I and talent management strategies, including hiring our first DE&I officer. During the year, we also launched welfare initiatives for our most vulnerable employees. Additionally, we are investing in our Accademia dei Mestieri as part of our approach to preserve and valorize our traditional manufacturing excellence and our Italian know-how while extending professional opportunities to young people. In terms of caring for the environment, we met a number of our commitments last year. First, we submitted our net-zero target to the Science-Based Target Initiative, a significant step toward fulfilling our commitment to combat the climate crisis. We launched Oasi Cashmere and are committed to having all cashmere used in our collections fully certified by the Sustainability Fiber Alliance by next year. This is just one of many steps on our road to traceability, leading to our long-term commitment of having at least 50% of our raw materials sourced from lower impact sources by 2026. Finally, we recognize that making sustainability a core value is not solely about what we do at the group level, but also about what the broader industry does collectively. We joined a number of partners to spearhead several industry sustainability projects last year. First, we joined the Camera Nazionale della Moda Italiana, along with several other foreign luxury brands, to launch the Re.Crea Consortium, which aims to manage products at end-of-life. We also joined the Fashion Pact with a number of global fashion brands in the Collective Virtual Power Purchase Agreement, which is accelerating the adoption of renewable electricity across the fashion industry. Please now turn to Page number 7. Before I hand over to Gianluca for a deeper dive into the numbers, I want to share just a few recent events we announced over the past few months. In February, we completed the redemption for Group Warrants outstanding as of February 27, 2023, resulting in a total outstanding share count of about 248 million and minimizing dilution by around 2.3%. On January 23, we announced the agreement to acquire a minority stake in the Canadian technical trail-running shoe company Norda Run, with an option to gradually increase our stake over the next nine years. Luxury outdoor, as part of luxury leisure, continues to be an area of focus for us. Norda Run uses the finest materials to produce all-weather footwear of the highest quality, which correlates perfectly with our value of creating the best product from the best materials. The agreement also provides us with a strong industrial and commercial partner, and exciting potential for the future. I must tell you that since the shoe's launch a few months ago, we have had a very positive market reaction across the board. Additionally, the Zegna winter '23 collection had two very exciting features: First, 70% of our collection was created using Oasi Cashmere, which besides being a key development on our Road to Traceability also reflects our focus on quality and using the best materials available to create our products. Second, we presented a full collection in partnership with Los Angeles-based The Elder Statesman, which was based on the strong relationship with the brand's founder. Finally, we launched Zegna X a couple of weeks ago, setting another milestone in our Road to Digital, adding a powerful Made to Measure configurator, which will further enhance our level of customization. Thank you. Now I will hand over to Gianluca for the recent events regarding Thom Browne.

Thank you, Gildo. We saw the return of Thom Browne to the year fashion week. We showcased an exceptional collection for 2023, both in the showroom and during the show itself, which received significant attendance and press coverage. I would like to take this opportunity to congratulate Thom on this great collection and the return to two-year fashion weeks, especially as he is now the Chairman of the CFDA. Regarding the lawsuit filed by Adidas in the U.S., Thom Browne faced a jury trial in January in New York, which resulted in a jury decision that concluded Thom Browne did not infringe on any of the trademarks of Adidas America. This was delivered shortly after a couple of weeks of trial. Another exciting development at Thom Browne, in line with our continued worldwide growth, is the agreement with the Korean partner Samsung C&T Corporation to directly operate the Korean business. As of July 1, Thom Browne Korea will assume direct responsibility for the productivity in Korea, which includes 17 direct Liberty stores, with plans to expand to 18 direct Liberty stores later this year. We will fully own the business in Korea and continue our innovative partnership with Samsung, which includes a very strong talent team managing the business. They have done an exceptional job, and we are excited about bringing our business there.

Yes, thank you, Rodrigo. '22 also saw a continuous journey of caring for our employees, the environment, and the community. People were a key theme during '22. We are actively keeping commitments made at our Capital Markets Day, launching various DE&I and talent management strategies, including hiring our first DE&I officer. We also launched welfare initiatives for vulnerable employees, further showcasing our dedication to our team. On the environmental front, we met several commitments, including submitting our net zero target to the Science-Based Target Initiative, reaffirming our dedication to combat the climate crisis. The launch of Oasi Cashmere connects with our pledge to ensure all cashmere in our collections is sustainably sourced by next year, targeting 50% of raw materials from lower impact sources by 2026. Sustainability is at our core. We joined various partners globally to drive industry sustainability projects, including the Re.Crea Consortium and the Fashion Pact for the adoption of renewable electricity across the industry. Now, I will hand over to Gianluca for financial details.

Thank you, Rodrigo, and thank you all for joining us today. Let me start by briefly reminding where we stand in terms of revenues. As we disclosed in January, revenues for the year were slightly under €1.5 billion, an increase of 15.5% over '21 in actual terms and 11% in constant currency. Both the Zegna and Thom Browne segments continue to show good momentum despite the well-known COVID disruption in China during the second and fourth quarters. This disruption generated a two-speed world in our business last year, and we want to highlight our pleased 42% year-over-year growth outside of Greater China, benefiting from the success of the brands and the expansion of the footprint, especially on the Thom Browne side. The fourth quarter of 2022 saw the impact of the termination of the distribution license for menswear with Tom Ford, which will also affect part of 2023 until the integration of the TOM FORD Fashion business takes place. We expect this integration to happen in the second quarter of this year. Moving to profitability, the adjusted EBIT for the year was up 5.8% from 2021 to reach €157.7 million, but the adjusted EBIT margin fell 90 basis points to 10.6%. Key reasons include increased marketing costs for both brands, corporate costs allocated to segment reporting, and the COVID-related disruptions in Greater China affecting the geographical mix. However, these factors are offset by improved profitability elsewhere. Overall, the financial performance reflects strategic positioning and market dynamics.

Thank you, Gianluca. We will now open the floor for Q&A. Please proceed with your questions.

Thank you for taking my question, and congratulations on another strong year. On your comments regarding the good start of 2023 and that Q1 is expected to grow double-digit with a strong base, could you provide more detail on the growth you're seeing in China? We're hearing from some peers of weakening consumer sentiment in the U.S.; is this something you're experiencing too? Also, could you comment on investment plans for 2023 and any specific projects you have planned?

Hi, Susy, Gianluca here. Regarding the growth, we can't provide specifics until we disclose Q1 results, but retail overall is experiencing solid double-digit growth across regions. Performance in the U.S. for Zegna remains solid, despite others not seeing the same strength. Regarding investments, we expect 2023 investments to be slightly higher than in 2022, with continued expansion in Thom Browne and some opportunities in Zegna. This includes CapEx investments in our supply chain and IT digitalization initiatives.

We are positive about the fourth quarter results. Growth stems from not just organic factors but our efforts to become a sophisticated retailer, improving personalization and marketing. This has provided consistent performance across regions after a previously mixed response. The focus on customer engagement, especially through our Made to Measure offering, has been a significant driver. Customer feedback and traffic to our stores reflect this as well.

Susy, does that answer your question?

Hi, good afternoon everyone. Thanks for taking my questions. Just following up on the China question from earlier. Can you help…

Please speak up; we can hear you faintly.

Apologies. Is that better?

Yes.

I was just going to follow up regarding China and the attitude of customers towards spending versus saving in a luxury environment.

The biggest surprise is in Macau. Chinese customers are eager to spend, with a high demand for new and iconic products, representing a significant portion of our sales. We see a high level of engagement and return visits from customers, which is encouraging.

New iconic products are key for attracting new clients to the brand, highlighting our marketing strategies and product offerings.

Does that answer your question, Louise?

That's perfect. Thank you for the color.

Thank you, everyone, for listening to the call. Our next reporting will be on the first quarter on April 20, without a conference call, as we've provided a flagship update. I'll be available to discuss the press release of the first quarter results with the management should you need to ask questions. Happy holidays and speak soon.

Ladies and gentlemen, this concludes today's call. You may now disconnect your lines. Thank you.

Thank you, Bruno.