Ermenegildo Zegna N.V. (ZGN) Q2 2022 Earnings Report, Transcript and Summary

Hello, everyone. And warm welcome to today’s Ermenegildo Zegna Group First Half Results Webcast. My name is Melissa, and I’ll be your operator today. [Operator Instructions] I now have the pleasure of handing over to your host, Francesca Di Pasquantonio, Director of Investor Relations. Francesca, over to you.

Thank you very much, Melissa. And welcome to everyone joining us today to discuss Zegna Group financial results for the six months ended June 30, 2022. We will be using the presentation material posted on our website earlier today. You can find the material along with the related press release under Investor page of the Zegna Group website. Today, I’m joined by Zegna Group Chairman and CEO, Ermenegildo Zegna; and our COO and CFO, Gianluca Tagliabue; and CEO of Thom Browne, Rodrigo Bazan. First, Gildo will walk through our results at high level, provide the business updates and discuss strategy and guidance and recent ambition. Gianluca will spend time going through the numbers and then -- and Rodrigo will cover Thom Browne. At the end of the call, we will have time for Q&A. Before we begin, I need to point out that we may make certain forward-looking statement during our 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 two of today’s presentation and this call will be governed by such language. Again, thanks for joining us, and with that, I will turn the call to Gildo.

Yeah. Maybe want to chase also in the Northwest [inaudible] In Italy, where we had our recent Board. I must say that after the dynamic and a war in 2021, a year, which was a milestone for our company and the year where we performed quite well and we continue to show the strength of our strategy confirmed by the results of the first half of this year and this despite the complex macroeconomic and geopolitical context. And I think that we are satisfied with results, both in terms of revenue and in terms of margin. And I must say that one of the key milestone of the first half has been the launch of the Zegna One Brand, what we call the rebranding project, which launched in July in our store with the product highly recognizable by icons. And I must say that another milestone is the recent corridor with Real Madrid, which was announced Wednesday, and which we believe it will be an incredible step forward to amplify our One Brand strategy and target new customers around the world and enhancing the value of two over Centennial [ph] brands layer and Real Madrid. If you move please to slide number four, there are some numbers I want to share with you. You can see from the slide that our performance has been quite remarkable. We have grown at the topline by 21% year-over-year, reaching revenues over approximately €730 million in the first half. Excluding Mainland China which was disrupted by COVID-19 related lockdown, because of closure compulsory from mid-March till end of May, our growth rate was remarkable 53% with U.S. and Europe doubling. Our adjusted EBIT margin ticked up by 20-basis-point to 11.3%, despite the planned step up in cost and unfavorable country mix from the weaker Greater China region. We’ve been paying there the cash surplus of €105 million despite the investment in the One Brand loans and some cash outflows, which will be described later by our CFO, Gianluca. If you can go to slide five and just that takes you through our core project that you know very well and before we go to slide six, which gives you the key highlights of our strategy. So let me focus first on the Zegna brand and then, lately, Rodrigo, CEO of Thom Browne will take you through the highlights of the Thom Browne brand. And I think that as far as Zegna is concern, we are keep making progress on our One Brand strategy and on Our Road to iconicity, which we believe firmly are the foundation of our future growth. And as you know, the One Brand strategy for Zegna was kicked off in November 2021 and we surely have accelerated that with many program of our stores and now we have 130 stores with a new model and we are looking at the second half of the year to do 80 more rebranding, only talking about this alone. I think the first collection of Zegna mono brand was launched in stores in July and was a good sign to highlight the recognizable iconic product within the brand. And through that we are capitalizing on the growth of the luxury leisurewear segment, which is becoming more and more important and the shoe segment, in particular, our iconic the Prestige that bought me the new changing needs of our customer and thanks to that we are adding new cus6tomers, I think, it’s very good news. I think that this change favors some interesting dynamics; number one, richer product content; number two, positive pricing dynamics; number three, higher sell-through in the store, increased double-digit with exception really China; and the good news of tightening the macro policy. And as you know, our goal is to eliminate totally the end of season sales by 2023. We have said, taking a great step in -- on our order to be more recognizable with the code of Real Madrid, which for us means dressing some of the world’s most recognized and admired talents in athletes that reflect the model man lifestyle. And it will also allow us to reach millions of fans around the world and continue growing the new customer base and I think that this year will be an additional amplifier of our brand strategy. And our Oasi cashmere product rollout, which it’s very important iconic project for us, each epic step in our role to testability and in the world of sustainability and ext in our rebrand in our store representing 20% of our repaid Fall/Winter purchases for our store and so I think that this is around into meeting our ESG strategy that we presented at Capital Market Day, [inaudible] a few months ago. I think Thom Browne has some good news to tell you about. I let Rodrigo to give some of the highlights of Thom Browne for the year that we are leaving. Rodrigo, please?

Thank you. Thank you, Gildo. Good morning or good afternoon, everyone. I will run you through some of the highlights of the Thom Browne performance. Thom Browne is continuing to make progress on our road to doubling sales in the mid-term, like we announced in the month of May, particularly I think with a focus on stepping up visibility for the brand. Today’s results a testament of the strength of our brand and the focus on the connection with our clients, despite a very severe set of disruptions in the first half of the year. During the second part of Q1 and during most of Q2, at least a third of our stores saw closures or hugely disrupted traffic, including our warehouse close in Shanghai for 10 weeks serving the business. The focus on the strength of our e-business allowed us to bounce back very quickly from store closures and much disrupted traffic due to COVID in Greater China. Our global e-business and thombrowne.com, Tmall and platforms such as Farfetch.com continue to see very strong growth and very healthy profit growth. We have a clear focus on stepping up visibility in our brand awareness, to name a few significant moments. Thom Browne stage our Men’s and Women’s Fall/Winter 2023 Show in late April in New York City, just the head of the Met Gala with outstanding visibility. I think it’s important to note that this is our first ever show outside of professional week and we’ve got a very significant visibility and success of that. Thom Browne few weeks after was back in Paris after more than two years with possibly one of his best man shows in the last 10 years, which generated rev reviews from professional critics, as well as outstanding exposure to consumers globally to fashion social media. During the show, Mr. Belhari [ph] presented Spring 2023 Men’s collections, but he also took the opportunity to stage a performance for which he presented Spring 2023 Pre-Collection, Post-Collection for women’s and that was effectively not shown in the shot on very elegant and very well known figures such as Dree Hemingway, Marisa Berenson and Farida Khelfa. This year, we were within the top five brands of visibility at the Met Gala. This is according to the Women’s Wear Daily with an impressive number of panels dress exclusively at Thom Browne such as, Lizzo, Kourtney Kardashian, Travis Barker, Oscar Isaac, Adrien Brody and 10 others of such great talents all wearing Thom Browne at the Met Gala event. In -- in terms of operations, we only added one directly operated during the first half, with most of the openings planned for the second half of the year. We plan on acceleration in the second half and we’ll close the year with more than 60 directly operated stores by the end of 2022. And globally, we account for also franchises in Shop and Shops will be exceeding the 100 stores by the end of 2022. And with this, I would like to pass the word to Gianluca Tagliabue, Group Chief Financial Officer and Chief Operating Officer.

Sorry. Yeah. Not [inaudible] I think it’s still my turn. I think we have gone through another important chapter of our story, which is the Made in Italy background. I say that the Made in Italy platform was, as you know, affected by the COVID problem, in particularly, Gildo did explained, but we came out very, very strong and we see tremendous growth in the first half of 2022, with Textile up 55% and Third-Party brands up 44% and hence the later all those going forward. These means we are really working to capacity in our supply chain plans, which is very, very good. ESG, this is a really important chapter of our history and our future. That means responsible growth which is really for over 120 years and if you recall during Capital Market Day in May, we shared our sustainability strategy, as well as 2026 with a commitment and I just want to mention a few that we marked in the last three months. In July we announced a number of sustainability-linked financing agreements and in August we submitted our target to SBTi and green mobility that is now we are car fleet. We have approximately 25% of the journey to reaching 100% fully electric or plug-in hybrid corporate vehicles by 2025. So we are updating you on this step by step progress on we achieved. On slide eight, I would say that, mid-term highlights some of the key points in the first half and these happen despite some disruption of the global environment, and I must say that, our global revenue excluding Mainland China shows restoration, also in second quarter 2022 with a growth rate of 59% from 48% in first quarter 2022. And the good news is that we delivered a strong profitability with 11.3% of EBIT margin, despite like the planned increase in costs and the deployment of the One Brand strategy and operational improvements have been driving revenue growth and profitability. Okay, on the back of our first half and also solid start of Q3, including a progressive acceleration in Greater China, the double-digit growth in August. We also decided to improve our guidance for the full year of 2022, which I will talk more in detail on the call. And in order to continue a good execution of the One Brand strategy and we are -- we believe that we are on track to achieve the mid-term target shared at the Capital Market Day in May, which you recall our revenue of €2 million and adjusted EBIT margin of 15%. And I think that we will be able to achieve or deliver those targets by continuing to stick on our strategic priority. I think that the strengthening, the pricing power of our products reaching out to younger generation and being able to execute well our retail strategy is in order to improve capability in the store, it’s a real priority. Thom Browne, I think, that we are going to need -- have a mix of organic growth, historic footprint expansion to exploit a number of opportunity both by geography and category. And on the Made in Italy Luxury Textile Platform, we really are working on a lean supply chain, an improvement on the time to market and we leverage on our scale, which is becoming more interesting. And I think that we will surely make sure to look around other opportunities to increase our specialization in new fibers or a new product development. And last but not least, a word on value potential from our digital and omnichannel approach. We have developed this platform again to see which is a way to create a Client Value Management proposition both for Zegna and Thom Brown, and I must say that, the new application is getting better and better, we are getting better and better outreach this time throughout our efforts in both Zegna and Thom Browne. I think that at this point I can give the baton to Gianluca who will take you through some of the other slides and give you more details on our current performance. Thank you.

Thank you, Gildo. Good morning, good afternoon, everybody. Today, I will drive you through the journey of our revenues, profits, cash, as well together with Gildo, on the guidance for 2022. First, page 10, let’s look at the revenues plus 21%, €729 million. The group achieved across -- good performance across channels, segments or lines and regions, of course, excluding the GCR, Greater China Region, which as we know, was affected from mid-March to the end of May by store closures. So what we look also to isolate this phenomenon, which, given the importance of Greater China for the Group is skewing the numbers. Let’s look at global numbers excluding Greater China Region and the revenues were up 53% with the second quarter was accelerating compared to the first quarter 59%, compared to 48% in the first quarter. We see that the positive trends on domestic consumers, we see a return of tourists with a particular rebound in Western Europe. Second, EBIT, adjusted EBIT was €82.7 7 million with a margin of 11.3% and revenues 20 basis points over the same period of last year. If we look at the Zegna segments was up 19%, but was up also in terms of margin in few basis points from 8.4% to 9.2%, despite the slight step up in costs, both at central level, some are related to logistic and the step up in the amplification of the One Brand. On the Thom Browne part, the growth was 30% in sales and EBIT margin was moving slightly down to 17% essentially, but still very good, due to the growth investment phase in stores and people. Profit came in at €21 million for the first half of the year, down from €32 million of last year. So outcome the profit is down given that EBIT is up by €60 million. This is a result of a €20 million (sic) [€28 million] increase in the value of the put option liability on the 10% Thom Browne’s stake that the Group does not own due to the impact of the good performance of Thom Browne and therefore the subsequent related reassessment of the value of the Thom Browne put option 10% liability, together with the negative currencies that of having the liability in dollar and having the dollar so much stronger than the euro. This €28 million this year, which is both in the financial expenses compared with a favorable 2021 financial income report that in the first half of last year when we purchased the 5% of Thom Browne at the value was -- which was lower than the liability that was in the books. Our cash surplus was €103 million at the end of June versus €145 million end 2021. The main drivers of this move are, trade working capital, where we see a temporary impact on inventory. If you remember, Gildo was saying, we launched the Fall/Winter 2022 One Brand first collection in July. So end of June, we were ready to go out of the gate with lot of stuff. And the second was that straight two months of lockdown in China. So some of the inventory in China we will carry over full price in the coming month in order not to create any disturbance on the march. Second, Real Estate Settlements, we had already accrued and the expenses were already taken care of. We had reserved funds covering for the Real Estate Settlements. We have been settling three major locations and this reflect the discipline and the focus on store footprint optimization. It was the cash flow, not the P&L impact. Dividend paid to minority, so again, in order to isolate the one-off thing of the settlement and the trade working capital increase that we deem as temporary we see a positive cash surplus increase. Again, excluding those factors that we deem we can consider that factor. So let’s go to page 11 and here we see a snapshot of first half revenues and it’s like a few key points that Zegna and Thom Browne enjoyed continue growth in U.S., Europe, rest of the world, more affecting the COVID new measures in Greater China. For the Zegna it was organic, together with the pricing power that comes with the repositioning of the offer, the price discipline, where we do see more and more mark downs and this has been particularly healthy on the business. We have seen positive Wholesale dynamics, Wholesale customer have been very responsive to the new offering, a new brand strategy for Zegna and the same with Thom Browne which maintains a broad based appeal on the Wholesale environment. If we look forward, the Fall/Winter orders, which again we deliver, starting from July were solid and spring 20 -- Spring/Summer 2023 Selling campaigns was very successful. If we move to page 12, here you see the revenue by segment. I call out the attention to the second quarter performance, which was solid both for Tom Browne and Zegna, despite the lockdowns from mid-March to May. On the Zegna side, if we go back to the first half, it’s a plus 19%. This was the result of the collection of Zegna, the deposition of the Zegna branded product, shoes and luxury leisurewear continuing to perform strongly. And with also we have seen tailoring and making to measure rebound in particularly in Europe and U.S. This was a positive addition to our strategy that is focused on leisurewear and shoes, but we enjoyed also this comeback on [inaudible]. In the first half of 2022 we saw a strong rebound of B2B activities, Textile and Third-Party brands, which I remember fall under the Zegna segment. And those segments continues to contribute strongly to the growth plus 30% in the first half, now close to €185 million with a growth at 360 degrees in all the lines, when we are running fast, the lines of e-commerce through Tmall, which was launched last year in the second half. So the first half of the year is anniversary against the first half of this last year where we didn’t have Tmall. Let’s move to -- we didn’t have Tmall on Thom Browne. Page 13 let’s spilt by geography, revenues increased significantly. As I said, with all geographies, except for the reasons we’ll explain breakout of the region. What is important is to call out the month of June on a standalone basis? The month of June DTC revenues in Greater China are higher than the month of June 2021. So we are our exit speed from Q2 June only after easing down of the restrictions, we are seeing the business power on a positive territory on the retail Greater China Region both for e-commerce that was increasing in important way and the rebound also in our brick-and-mortar stores after the relaxation of the restriction and this positive trend, we have seen is continuing in Q4 till to-date with good July and August. In particular, Thom Browne DTC, we can call out, that rebound double digits compared to the June 2021 month. I think that is it by geography. We can go to the product line view. Here you see by product line, all the product lines were kind of positive territory compared to the first half of last year. Zegna branded products up 13%, driven by factors we explained, the overall performance in Q2, we need to understand was influenced by DTC retail in Greater China, excluding which Zegna branded products were up by healthy double-digit. When I talk about double-digit, it’s not the region of the teens but high double-digit percentage. Thom Browne 30% growth in first half and 41% in second quarter, driven by strong demand for both seasonal and classical products and we also hear you are retail impacted by GCR. Again excluding this also Thom Browne retail was extremely solid double-digit figure in the second quarter. Textile plus 55%, and finally, Third-Party brands 44%. Thanks to strong deliveries to Tom Ford and Gucci in particular, when we produce on behalf of this client. Page 15, by channel, you see here also, when you see the DTC evolution, you see the impact of the GCR lockdowns. Group sales on DTC was up 13%, representing DTC 59% of total revenues with a growth rate in the second quarter by 4%. The performance was driven by the success of the Zegna branded product with local consumers and the resumption of tourists in Western Europe. In particular, DTC from Zegna branded product were up 6% in the second quarter, compared to 23% in the first quarter. This underlines the strong organic growth and the limited contribution of three net store openings compared to June last year. Similar for Thom Browne, the second quarter DTC sales were down 2%, compared to the 22% plus in the first quarter. Again, let’s remember that Thom Browne retail network in China is particularly important and is even more concentrated in megacities affected by lockdowns and the network of Zegna. As I said before, I think, looking forward, we need to look at the month of June, where we have seen a positive rebound both for the Zegna retail and Thom Browne. Wholesales trend, we are seeing a good acceleration in the second quarter, 46%. There has been no change in the timing of delivery. So this business driven and when you see that this is for Thom Browne. The Wholesale sales for Zegna minus 3%, reflects the cancellation of Russian orders and the start of Fall/Winter sales, shipments only from July. If we back out Russia we would have been in a positive territory double digits reflecting the good reception of the new direction of the collection by our Wholesale partners. Moving to page 16, now we move to the adjusted EBIT, €83 million, up €60 million versus last year, plus 23.7% with a margin expansion of 20 basis points. The drivers of these improvements are, of course, scale, positive pricing dynamic, richer product content, higher sell-through at full price, fixed cost leverage, Wholesale and industrial part, because we are running the fab factories at full capacity, productivity improvement in the stores in terms of dealer per square meter. Those -- these all more than offset two things; one, the unfavorable time permits, because of course, China is a positive addition to our margin and going down was a detriment and we anticipated, not the surprise, step up in central costs related to listing and the marketing dollars that we are very happy to spend in order to amplify the new direction of Zegna brand and increase the awareness of the Thom Browne brand on the other side. Page 18, these are the key numbers of the Zegna segment, €51 million adjusted EBIT, margin up 9.2% up from the 8.4% of the last year. Of course, the topline organic growth is generating scale effects, positive cost leverage, there is a positive pricing phenomenon that were all compensating for the higher operating costs, as I mentioned before, in terms of advertising and compliance. Page 20, I needed to -- I go, okay. Quickly the Thom Browne segment is up in terms of absolute value of the EBIT not as much in terms of percentage on revenues. This is related to growing cost on personnel on Headquarter functions strengthening and on the store expansion from 45 stores to 53 at the end of June of this year. Page 22 here are the recap of all the numbers that I had explained. I would call out that we don’t have significant adjustments, while last year we had to spend a lot of time explaining the adjustment to relative to the business combination. Now, I call out that the profit reported and the adjusted profit or the operating costs and the adjusted EBIT look very similar. So we are back to normal situation in terms of exporting making a conciliation of reported to adjust. I think that all the comments of this page has been delivered. If we go to page I think also page 23. I move to page 25. We continue to invest in our growth strategy, CapEx at €28 million in the first half of this year 4%. Revenues we expect to land this year more in the region of 5% and 4%. So there is, Rodrigo mentioned, there is a big lineup of store in the second half of the year and there are also some actions on the Zegna side on second half of the year. So -- for the year, we should have mind more 5% than 4% and on the trade working capital the phenomena is especially the inventory going up at the end of June related to the launch of the brand and unsold stock in Greater China, which I repeat we are considering as fresh merchandising we are carrying over. So it’s not creating impact for us in terms of obsolescence. I moved to page 26 give the word to Gildo.

Okay. There is a little bit to me with a couple of good news that all, as you’ve seen in the first half of 2022 has been better than our expectation. The situation in Greater China has been improving since June and overall we had a good start of Q3, as well as a solid order collection, positive pricing for both the Fall/Winter 2022 and Spring/Summer 2023 season. As a consequence, we are raising our full year 2022 revenue guidance from low-teens to mid-teens growth at actual exchange rate versus 2021. We also expect a solid improvement in adjusted EBIT, with adjusted EBIT margin in the range of last year’s as topline tailwinds should mitigate the expected increase in industrial costs and logistics, and the step up in listing related overheads and rebranding. And together with this, we expect the increase in the cash surplus in the second half. Now all this assuming that no further deterioration or geographic extension of the war in Ukraine and a continuing normalization of the COVID-19 pandemic in Greater China and no significant macroeconomic deterioration and no other unforeseen events. But at the end, we have decided to raise the revenue guidance for the reason I mentioned. I think, at this point, I turn to Gianluca for a couple of more highlights and details.

Thank you, Gildo. So page 27, for the ones that were present in person or remotely at the Capital Markets Day. This was the chart where we explained the assumptions behind the guidance for 2022. We refreshed it so you can compare it to the one in May and why we believe that from low-teens, we can be in the mid-teens range. I’ll help you making the comparison, so Greater China we had in mind. At that time, the assumption was easing out at the end of the summer of the disruption, which is luckily happening. U.S. & EMEA we had in mind a number for the year around 30%. At this point, we believe it will be higher than that. For the Zegna brand we had at that time in mind around 10% and now we are looking at double-digit number. Thanks to what Gildo said, we now have the order also in the Spring 2023, we have the full collection to be delivered before 2022 and we are ready to go. Thom Browne we have in mind around 20%, now we see more than that, more than 20%. So all this improvement let us look at the year in a mid-teens growth and bottomline we declare a solid -- we declare improvement on the adjusted EBIT in absolute terms, now we see a solid improvement and we qualify that the adjusted EBIT margin we see it in the range of last year. We need to consider the step-up in margin and central costs this year a demand. So we stick to an adjusted EBIT margin in the range of last year’s for these reasons for the one up -- one-time step up of these costs. This I think and just to conclude the presentation. And thank you everybody for joining us and with that I’ll hand it back to Francesca for the Q&A.

Thank you, Gianluca. Thank you, Gildo. At this time, we’ll have lots of time for Q&A. Operator, can you please open the Q&A session. Thank you.

Of course. [Operator Instructions] Our first question today comes from Susy Tibaldi of UBS. Susy, over to you.

Hi. Thank you so much for taking my questions and congratulations on a very strong set of results. I have a few questions. So the first one would be you already commented on the performance of July and August, and was very helpful. And but I was wondering more from a qualitative point of view, if you are seeing at all, if you feeling any change in the way that the consumer is behaving, because of course, now it’s been several months of a lot of negative news flow on the macro situation and everything? But suffice is that the luxury sector is continuing to be very strong. So I just wanted to hear also from you. You can see any change at all in the consumer behavior that would suggest that something maybe starting to become a little bit more fragile. Secondly, on the outlook for this year, I want to do, again, ask a little bit about your expectation, because if you -- in the H1 it was growing very strongly over 20% and so your topline, I think, it’s flattish to a 10%? But you mentioned an acceleration for Thom Browne in H2. You have very strong visibility now in order books. So it does seem like it is a little bit conservative you’re subscribed that helps a bit, so on volume, it seems a bit conservative. So I just wanted to check your assumptions there again, because it sounds like the trends result which to have been very strong. Then last year marketing, can you specify again what kind of marketing you expect for this year and is this is a level -- you said these are levels that will continue to be higher? So if you can just specify what kind of range in the marketing spend we should expect and differs to the margin, and so now China is back, so it’s not as bad as it was in Q2 so your country mix should be positive and helping the margin. So I guess these questions are a little bit on the lines of how much cautiousness are you implying into your H2 guidance? Thank you so much.

Many questions?

Thank you for this.

[Inaudible]

Yes. All right.

[Inaudible]

Okay. So I think, Gildo, start with the question on whether the current global market financial situation is impacting the consumers actually?

Listen, on China we have so much said, the closing of with two and a half months of lockdown, not exactly the past all the rules valuing and so I think it’s premature to go with rules and even though we see a positive trend in this way. However, I can talk more deeply on both amidst America and United States, North America and Europe, and in particular, EMEA, at least we have seen an incredible attraction by the current customer and also by a few number of new customer. They just want to shop for newness or they just want change the work flow. And so I think that what we have it seems to please them I think there’s more [inaudible] work out, which is the last confirmation of our luxury leisurewear we still believe that. And I think that they are affected by the economy from not simply by the product and by the original material many products. So I think we are going through a new shopping experience, which goes throughout the world. On top of that, if you ask the users and the North Americans travelling mainly in Europe I think surely have -- beneficial the strength of the dollar and the fact that American are back in Europe and talking about the last material then went America and that really have shortening as well. And in terms of decrease in tailoring side, I am not saying that, we are off to good start, it seems that, hence business people are going back to their office there had to report at work, so its pleased to know in particular in the last couple of weeks, a good traction on continuing, I am sure a nice, which is quite interesting. So I must say that all-in-all we’re to a good start and we are watching carefully, whether these dynamics will need to for the COVID in China. Last word on EMEA, I mean, Dubai is on fire, it’s unbelievable to see a low and we are in the low probably decision and how tourist or even business people are shopping. So we are, again, we are doing better than our expectations. So all in all a positive trend and we see that what we offer overall the trend will continue. Gianluca?

So the first question, I think, your underlying message was, are you sure that you’re not conservative in the guidance? If I understood correctly, that’s the key point. Of course, there is volatility we need to take that into account in the guidance. We don’t disclose guidance by specific market channel. But we have been cautious by putting the mid terms -- mid-teens guidance on Q4 in China without giving detailed numbers, but the underlying assumptions that is not far off last year. So when you consider Greater China retail Q4 close to last year, you understand why we project in teen, if it will be higher than that, we might enjoy the call little different. But adding that assumption, we believe that mid-teens is a fair representation of our outlook. Then, in marketing, the question was on marketing we declared in the Capital Market Day in the IPO journey, that we were ready to step up by 1 point marketing, this is happening, the journey a step up will happen in 2023 against 2021. So this year, consider that the first half of the year, all the marketing activation that were planned for China, we are put on hold, of course, because we didn’t amplify anything since restrictions were up and running. So we’ll start amplifying heavily now, from September, we are the cashmere campaign as of now we’ve Real Madrid. So the journey of spending the extra 1 point is not changed and will be finalized next year with the step up of 1.2 marketing spending.

And the margin guidance, Gianluca.

And the margin guidance, we have been plus 20%, sorry, 20 bps in the first half compared to last year. And also, as I said, considering a conservative Q4 on Greater China, we assume for the full year similar margin. Again, as I said on the revenues, the two things are very combined. If the Q4 in China is different than our assumption we might have different revenues and different margin on the bottomline. That is I wanted to be explicit what’s behind. On the other side, there is no assumption and it’s a fact we will have to step-up in marketing, actual money and also some basis points and we have to step-up on central costs, which of course are related to being a corporate company and all the compliance that is related New York.

And Susy does that answer?

Yes. Very clear. Thank you so much to all of you.

Thank you. Thank you, Susy. Operator, we are ready for the next question.

Perfect. Thank you. So our next question today comes from John Guy of Jeffries. John, over to you.

Thanks very much, Gildo…

Hi, John.

…and to Gianluca, Rodrigo and Francesca. Thanks for taking my questions. The first one is on markdown reduction. Could you talk a little bit more about that the percentage of markdown reduced in the first half of 2022 versus 2021. And just confirmation that you said, you were going to eliminate end of season sales I think by the end of 2023? That’s my first question. Are you able to quantify the step-up of investments that you’ve made for both Zegna and Thom Browne brands across marketing stores? And for Thom Browne what do you think is a sustainable sales contribution on the expansion of space over the next three years? And then I just had a question around Made in Italy. Do you think it’s fair to say that, when you look at your assets that you have on the manufacturing side, relative to peers, do you think that’s pretty unique and what other assets would you like to add to the portfolio going forward, if I could start with those, but that would be great? Thanks.

Thank you, John.

Let me start. It’s Gildo. Hi, John. With the last one and we then lead to Rodrigo on Thom Browne and to Gianluca for the lockdown in the same part. Now the Made in Italy, I think this split in two, one is the Made in Italy platform, which is, I would say, the textile part, which we have seen -- we’re doing joint works and the result are quite exceptional and we did not expect and we are really running the shift in order to make up for the production. And to be honest with you we thank God that we have a material on the site, because there are a textile that has not performed with the material, they are in trouble, that’s why they long lead the supply chain or delivery. So we are very thankful to have the full control of the supply chain particular from the textiles. And the fact that we have a diversified textile base emphasis to be very creative in the private we have to use. And it’s no more seasonal, I mean, they have seen in winter, they have especially in summers. So I think that -- so -- so the point I’m making is that we want to strengthen the chain which we are finally actually we are looking is more likely to be added to the textile supply chain, in order to each scale the plant that we are able to do so. I will be telling you that we are working on something on small things, but we won’t describe the chain. On the other side, we are increasing our parts of probably in Italy, Made in Italy some new brands and the fact that we are raised our luxury. If you want content of also power, maybe delivery is becoming more than that. If you compare Made in Italy outside, potential acquisition, we keep our ears open and I don’t have any comments related to that. So, overall, strengthened capability, yes, and we are watching to see what could be interesting to our platform.

Gianluca?

So, the first was on markdowns by confirming that our forecasts to, the reduction of markdowns is advanced. So in the first half of the year, it was very, very low incidence of markdown, we’re talking low single-digit. From fall 2022 we are not planning on markdowns in the boutiques and e-commerce, and we start on the essentials that is the continuity product on Wholesale. From 2023 we extend the policy of no markdown to across the Board in the channels. So this is confirmed in the context of moving to a luxury position. In terms of marketing, I think, you asked something. Did you…

Yeah. He asked about Thom Browne and…

Thom Browne.

…the composition of three and Rodrigo will give the answer.

Yes. If you want me to address the space contribution to Thom Browne, its actually limited, because as we introduce in May during the strategic plan presentation, we are envisioning around 50 additional stores, this is total amount of stores, stores that are further franchises where they shops and we’re going to be in roughly 100 by the end of this year. So there is limited contribution of square meters of additional stores, we’re not changing our store format or store our model, retail model. And but we are looking for a much more significant growth of clients and we’re much more focused on the growth client, that’s why client value management, it’s a very important project for us, where we have the right tools and the right focus to double the amount of clients that we have, the influence of the brand, including the amount of clients within the DTC network.

John, does this answer your question.

Yes. That’s very clear on the stores. I guess the only part to the question which hasn’t been addressed yet is to do with the quantification of investments made in terms of millions for both Zegna and Thom Browne in the first half of the year. So across things like investments made, additional investments in marketing, additional investments made in stores, people, et cetera, what are the numbers, the incremental investments made for both of those brands? Thanks.

So, you can see from the P&L, the investments, there was a growth both on personnel in terms of overall cost that was lower than the growth of the topline. Of course, there has been -- that’s why we are not disclosing by nature the cost or increasing market. I tell you, we are -- in marketing for the year we are increasing the expectation is to increase more than the mid-teens, so in the region of -- for this year, next year in the region plus 20%, plus 25%, this year and next year. So every year 2022 and 2023 plus 20%, 25%. This year is more 20%, next year will be more 25% marked, to give you an idea. I need also to stick to the compliance of what we disclosed in the SEC and what we don’t. So I’ll give you some hints of our model then. So the marketing definitely the step up and there has been some step-up against that it was not part of this SEC compliance. So I cannot be more specific in terms of number of central cost increase, but that was the drag in the first last -- half of last year we were in known listed company. So we didn’t have some costs, like, the insurance of the Directors and to serve that it’s linked to the New York Stock Exchange. We didn’t have the SOX compliance. In terms of CapEx, which we said, we disclosed, we do disclose, you can see it’s the 4% at the end of the year, you need to consider that probably it will be more, it will be 5%. And CapEx is for Thom Browne openings, they are concentrated in the remainder of the year and for Zegna there is lots of relocation and renewals more than store opening. This is also a trend for the next coming years. Thom Browne is adding now 52 stores definitely that will be addition of stores in the coming years. Overall, this year, it’s close to nine stores that Thom Browne is opening and we need to expect that this growth rate of store footprint for Thom Browne might replicate for the coming years. So that number you could have in mind in terms of store opening. Zegna, Zegna is more renewal and rebranding. You need to consider that mean so far we have rebranded with a new logo under 30 stores. We will have by the end of the year almost entirely the network done. That is another task force for this year to complete the rebranding. And together with rebranding we will take also the opportunity often to renew the entire store to be more in tune with the new collection and also where possible to reduce the square meter in order to optimize the spaces, now we don’t carry three lines, we carry more lines.

Absolute, Gianluca. That’s very clear. Thank you, Gildo.

Thanks.

Thanks, John.

Thank you, John. Melisa, I think, we would like to close today’s call. We thank you everyone for attending and our next results announcement will be the Q3 revenues on the 27th of October. Have a good day and again thanks to everyone.

Thank you, everybody.

Thank you, everyone. This concludes the call today. You may now disconnect your lines.