Ermenegildo Zegna N.V. (NYSE:ZGN) Q4 2022 Earnings Call Transcript

Ermenegildo Zegna N.V. (NYSE:ZGN) Q4 2022 Earnings Call Transcript April 6, 2023

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

Francesca Di Pasquantonio: 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 form, which is the customary 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.

Ermenegildo Zegna: Thank you, Francesca, and hello to everyone. I’m very happy to share that we ended another strong year. And our results for ’22 reflect a strong momentum and desirability of Zegna and Tom 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. And however, we have a number of initiatives to continue building on Zegna success and reinforce its position as one of the world’s top luxury brand and the leader in menswear. Tom Browne, continues to show strong performance also.

And besides the numbers, we are very proud of the great reaction Thom Browne Paris and New York shows that has been received last year as well as this year from customer, the media and influencers. And of course, no discussion of our ’22 is complete without mentioning our very exciting partnership with the Estee 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 customer to our collection across our global network and in particular, European and American customers, will continue to drive our growth this year, and we are particularly excited by the progress of our Made to Measure business, which is up double digits when compared with 2019 that 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 at strengthening our market-leading position and pioneering new high-potential markets as Saudi , as Central Asia and Southeast Asia and India. And we are also, as always, working to strengthen our Made in Italy manufacturing platform with projects aiming at expanding our production capacity in footwear as well as in clothing manufacturing plants, adding up to 300 people to our Italian workforce by the mid-term. Made in Italy manufacturing actually remains a priority for us today.

113 years after the foundation of the company. And in this regard, I am also proud to remark that we have launched Accademia dei Mestieri, our vocational training project. And 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 that I’d like to turn to some financial highlights of ’22. While Gianluca will go more into depth later in this call. As we disclosed in January, our revenue for the year were almost €1.5 billion, and we have 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 restriction in the second and in particular fourth quarter, our revenue grew 42% in ’22 over ’21 with strong performances by U.S. and European customers as well as consumer from the Middle East.

Our profit in €˜22 million, 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 cost 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 from ’21, but reflecting cash generation in the second half of last year, in line with guidance. And Gianluca will give you more details on this point later on as well. Now please turn to Page number five. And looking at our journey over the last three years, ’22 showed continued sales growth and healthy profitability even as the global environment continue to be uncertain, and as Greater China was hit with temporary store closure that COVID-19-related restrictions.

As I said earlier, we are seeing the reopening in the Greater China already and have a positive impact on ’23, which we believe will continue for the rest of the year. Now please turn to Slide number Six. I’d like to talk to 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 product, especially footwear and our luxury leisurewear, that continue 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 in formalwear, in line with the churn to offices and the uptick in demand for menswear for social on special occasion, in particular, evening wear.

Our relationship with our customer is one of the strongest drivers for our success, and we have always prided ourselves on providing excellent customization in the product and service. Our CRM is becoming more sophisticated. And last year, our direct customer engagement was responsible for driving 35% of the revenue of our boutique 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 build on strengthening this relationship. And as of today, the business generated through this outreach approach reached 50% of our boutique revenue ahead two years to the target, outreach represent the powerful tool to the set demand and capitalize on the increasing popularity of our collection and iconic product.

Thom Browne also had a number of milestone last year. The brand added 11 net new directly operated stores around the world, bringing the total to 63 stores and 105 point of sales. Rodrigo will now give you some color on Thom Browne now. Thank you. Rodrigo, go ahead.

Rodrigo Bazan: Thank you. Thank you, Gildo. Similar to the world of Zegna and although we come from different histories and different backgrounds and different amount of years in the market, we have an equally important customer centricity at Thom Browne. So, we continue to strengthen our client value management program, which is the key tool and the key program that we’re looking to expand not only the exceptional high level clients that we have, the additional new visitors to the brand that have very significant initial purchases as well as the walk-in and initial transactions. We’re very, very focused on this. Our main goals going forward are two. One is big expansion of an awareness, and secondly, a big significant expansion on clients.

In order to support that, we do believe that we have an exceptional product, an exceptional client, and we have to have exceptional tool suite. So we are completing at the end of this month the rollout of the sales force tool for Clienteling marketing and customer service. We’ll be having 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 in consolidated expenses, we’re also keeping our marketing investment to expand significantly our customer base. We have been extremely pleased for the reception of our shows, both in New York and Paris, over the past nine months. And starting from this summer, we’ll be celebrating 20 years of Thom brand, 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.

Ermenegildo Zegna : Yes. Thank you, Rodrigo. And I must add that ’22 also saw a continual journey of caring for our employees, the environment and the world around us. People was a key theme during ’22. We’re keeping up with the commitments we announced at our Capital Markets Day in May, we developed a number of DE&I and talent management strategies, including higher our first DE&I officer. During the year, we have also launched a welfare initiative for our most vulnerable employees. And as I anticipated earlier, we are also investing in our Accademia dei Mestieri as part of our approach to preserve and valorize our traditional, our manufacture excellence and our Italian know-how while extending professional opportunities to young people.

When it comes to care 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 big step in ensuring that we are fulfilling our own to combat the climate crisis. We launched Oasi Cashmere, and we are committed to having all cashmere used in all the cashmere collection be fully change by next year as certified by the sustainability Fiber Alliance. This is one of many steps on our road to Traceability, leading to our long-term commitment of having at least 50% of our raw materials trade for the geography comparing from a lower impact sources by 2026. Finally, we know that having sustainability as I heard of everything we do is not just about what we do at the group about what professional industry guests collectively.

Photo by trung-do-bao on unsplash

Meanwhile, we joined a number of partners to spearhead among others to industry sustainability project last year. First, we joined the Camera Nazionale della Moda Italiana and number of other foreign luxury brands and launched the Re.Crea Consortium to manage product at end-of life. We also joined the Fashion Pact and the 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 Seven. Before I hand over to Gianluca for a deeper dive into the numbers, I want to share just a few recent events that 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 number of outstanding shares of about 248 million and is minimized dilution of around 2.3%.

On January 23, we announced the agreement to purchase a minority stake in Canadian, technical trail-running shoe company in 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, and Norda Run using the finest material to produce all weather footwear of the highest quality, which aligns perfectly with our value of creating the best product from the best material. The agreement also provides us with a strong industrial and commercial partner and the exciting potential for the future. And I must tell you that since the shoe has been launched a few months ago, we — so far, we really had good market reaction across the board. The Zegna for winter ’23 collection also had two very exciting features.

First, 70% of our collection was created using Oasi Cashmere, which besides being a center development on our Road to Traceability also reflects our focus on quality and using the best material available to create our product. Second, we presented a full collection in partnership with Los Angeles Bay, the Elder Statesman, which was based on the strong relationship between our based on artistic and change the brand’s founder. Finally, the launch of Zegna X a couple of weeks ago, which sets another milestone in our Road to Digital adding a powerful Made to Measure configurator, which will further enhance our customized level. Thank you. And now I will go over the recent events to Thom Browne led by Rodrigo.

Francesca Di Pasquantonio: Rodrigo?

Rodrigo Bazan: Yes, I’m here. Sorry. Yes, we saw the return of Thom Browne in the year fashion week. We saw an exceptional 2023 collections, both in the showroom and in the show itself, which has a great opportunity with the show having a very significant coverage in terms of attendance and in terms of press. We would like also to give this opportunity to congratulate Thom on this great collection and the return two-year fashion weeks, supporting it being by now the Chairman of the CFDA. In respect to the lawsuit filed by Adidas in the U.S., Thom Browne faced a jury trial in January in New York whose outcome has been posted Thom Browne did not infringe on any of the trademarks of Adidas America. This was a jury decision that came out within a very short amount of time right after almost a couple of weeks of trial.

Another exciting development in Thom Browne, in line with the continued worldwide growth, is the agreement with the Korean partner of two years, which is Samsung C&T Corporation. Through which Thom Browne will directly operate the Korean business. And as of July 1, Thom Browne Korea will assume directly responsibility, productivity in Korea, which is 17 direct Liberty stores, turning to 18 direct Liberty stores later this year. So we will be fully owning the business in Korea, and we will continue the partnership with Samsung, which is a very innovative, we believe retail management agreement with Samsung. We have never had such an agreement. And in a nutshell having one of the most exciting markets in the plan, which is South Korea today run by one of the most — one of the strongest talent teams in Korea, which is the Samsung C&T team running the business.

They have done an exceptional job bringing our business right now we fully own it. And with that, I’ll pass the word to Gianluca to go through the financials this year.

Gianluca Tagliabue: Thank you, Rodrigo, and thank you all for joining us today. Page eight, let me start by reminding briefly 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 Zegna and Thom Browne segments continue to show good momentum despite the COVID well-known disruption in China of the second and fourth quarters. This disruption have generated a kind of 2-speed world in our business last year, and we want to point out our pleased 42% growth year-over-year out of Greater China, with this benefit from the success of the brands and the expansion of the footprint, especially on the Thom Browne side.

We remind you also that the fourth quarter of 2022 saw the impact of the termination of the distribution license on menswear with Tom Ford, which also affects part of 2023, until the integration of the TOM FORD Fashion business will take place with the closing, which, as Gildo was mentioning before, is expected to happen in the second quarter of this year. At that point, this decline of the termination of distribution will be compensated by the line-by-line integration of Tom Ford. Moving to Page 9, profitability. The adjusted EBIT for the year was up 5.8% from 2021 to reach €157.7 million compared to an adjusted EBIT of last year it was 90 basis points higher. And this year, so we get to 10.6%. The decrease in the margin was due to the following factors: First, the step-up in marketing costs for both brands, which we anticipated in the Capital Markets Day, which will slightly continue also this year.

It’s a journey. Second, an increase in what we call and you will see in the new approach of segment reporting corporate costs, which have been allocated to dimension of segment reporting, and we will discuss shortly. These are €11 million of increase. Third, the cost related to the SOX Sarbanes-Oxley compliance, which occur in both the Zegna segments and Thom Browne segment. Finally, which is the biggest impact is the COVID-related disruption in Greater China in the second and fourth quarters of last year, which created an unfavorable geographical mix effect. This has created, as I said before, the largest impact. And if we want to turn it into 2023, it becomes an important tailwind for us adding into this new year. So it becomes like a credit from the recovery of China.

This has been all partially offset by an important improvement in the profitability of the business everywhere else in the other geographies and in the other product lines. Adjusted profit at the end landed at €73.6, down slightly from €75 million of last year despite the improvement at the operating level that I mentioned before due to financial items and financial charges. I will mention and I will call out especially because they are peculiar, the increase of foot option liability and warrant liabilities for a total charge of €23 million in 2022 P&L as well as financial charges related to portfolio results in ’22 compared to a profit in prior year. We note that after the redemption, the ups and downs of warrant liability will get out our P&L, but only from 2024, while in 2023, we expect the redemption of warrants that occurred in the last month to have a negative one-off impact that we estimate in the range of €26 million.

This is coming from the mark-to-market value of the warrant redemption compared to the fair value that was posted at the end of 2022. Group profit for ’22 came in at €65 million compared to a loss of €127 million last year, which was primarily attributable to the cost incurred in connection with the business combination with the SPAC . Now moving to Page 10. I don’t want to go line by line into this income statement, but this is just to anticipate that this current shape of our income statement as we had the chance also of talking with some of you along the way, we are preparing in 2023 the transition to a representation of cost by destination, which is much more common in the industry, and this will allow us to report the gross margin, which in our current structure of the income statement is not visible.

So this will happen with the first half results, and we hope to be able to provide you with a restated pro forma of prior years when we released our first half revenues at the end of July. Now let’s go through to the profitability by segment, starting on Page 12 with the Zegna segment, which I remember both the Zegna brand, the Textile business and third-party products that is when we produce for other brands like Gucci and before end was also Tom Ford. We mentioned in prior announcement that we have traditionally allocated the corporate cost to the Zegna segment, thus affecting negatively this segment profitability. Now as I anticipated before, we have started to report corporate costs separately, and we will discuss this shortly. Under this new approach to segment reporting, the adjusted EBIT for Zegna segment came in at €141 million, up 7% from prior year, with a margin — EBIT margin of 12% compared to the 12.7% of the prior year.

The Zegna One Brand strategy and our repositioning drove improvement for the segment that we are partially offset by the country mix, mainly impact in China, the higher marketing costs, together with rebranding, higher personnel and compliance costs mostly related to the SOX compliance and higher depreciation and amortization. If we go to Page 13, Thom Browne segment saw an improvement in both the absolute adjusted EBIT as well as in the margin. The adjusted EBIT for the segment was up a strong 26% to reach €48 million, while the adjusted EBIT margin went up from 14.4% to 14.5% in 2022. As we continue to invest in the growth of Thom Browne, scale benefits are contributing to the improvement. On the other side, they were partially offset by growth-related expenses, including the expansion of the store network, of net 11 DOS higher marketing costs as for Zegna and investments to improve central processes within Thom Browne.

Page 14. Now we’ve come, as I said before, to the topic of corporate costs. These costs include activities and functions belonging to the holdings that are not attributable to either Zegna, or Thom Browne segments. This cost, as I said, were previously included in the Zegna. These costs have increased significantly following the company’s public listing in December, primarily they relate to the Board, the cost of functions that are centrally managed on behalf of the entire group, such as Group General Counsel, internal audit, investor relations, central finance, the insurance coverage for directors and offices and so on. For 2022, corporate costs came in at €31.9 million, 2.1% of revenues. This compares to €21 million, 1.6% in 2021, where all our structure was not up and running entirely.

Other listing costs are posted directly in the Zegna and Thom Browne business, and these are related to the SOX compliance within the operating legal entities of the two segments. Going to Page 15, some details on cash position and we make cash situations like CapEx and working capital. We ended ’22 with a cash surplus of €122 million up compared to the midyear of €103 million, in line with the guidance and down from €144 million at the end of the year. If you want to bridge end of ’22 compared to end of ’21, these are the driving factors. We paid within the year, €26 million in dividends, not only the dividends to the NV shareholders, but also to other minority shareholders of controlled entities, €73 million in payments for CapEx, mostly related to store network, that is on the Zegna side mostly in the remodeling and Thom Browne is mostly expansion.

But I would also to have to flag IT investments, investments in manufacturing plants to expand capacity. A couple of examples we are expanding capacity and outerwear in those to improve efficiency and sustainability, we are putting several title around groups of the plant. There has been another topic that this factor affecting cash is €41 million higher trade working capital, which had a flat percentage on revenues around 21%. And €33 million in real estate settlements on stores. This P&L charge has been already accrued prior to 2022, but saw the cash outflow for some settlements related to Madison Avenue. Zegna store of converted taking place in 2022. As we look at, we believe that we have worked carefully on the optimization of our store networks and so most of the rationalization has happened at this point.

As we see the specific part of the trade working capital, it’s important to understand what happened to the inventory in order to be not, let’s say, concern. A significant portion of the increase was planned. There is a part of the increase was related to our desire to secure pressures raw materials availability during times of volatility. So there has been aware decision to build inventory in some specific raw materials like cashmere or fine rules. And we also built solid availability of the essentials. Essentials is the continuative part of our Zegna brand, which is aimed to be never out of stock. So we made a step-up one-off of the availability of Zegna Essentials. And of course, there has been the part that was unplanned related to the fourth quarter of China, which has some stock, which we believe with the reopening in China now becoming as becoming in Q1 an opportunity in order to capture an increase in demand.

And so we don’t see any problem on the inventory coming from China. We expect this excess at the end of ’22 to be quickly be absorbed in this last month and next month. So now I’ll give it back to Gildo to talk about outlook.

Ermenegildo Zegna : Thank You, Gianluca. It’s a very clear explanation. Finally, let me share a quick update on our dividends. And subject to the acquired approvals, we tend to make a dividend distribution of €0.10 per share, it’s €0.10 per share to the holders of ordinary shares, It’s also of approximately €25 million. This will be decided to our next AGM, which is currently expected to be held on June 27. Now I’d like to talk briefly about our outlook for ’23 and beyond. And at our Capital Markets Day last May, as you recall, we shared our medium-term target for the group, excluding the integration of TOM FORD Fashion, of course, which was mainly revenue of €2 billion overall and adjusted EBIT margin of at least 15%.

As I shared at the top of the call, we now define medium term as the end of fiscal year 2025. For ’23, we are encouraged by the start of the year, which is well above our expectation with broad-based strength, a very dynamic Made to Measure, business, which well exceeds the prior record level of both ’22 and 2019. And our return towards the Europe and key Asian hubs like Hong Kong and Macau, which I think is very important. We expect that our 2023 results will show comfortably that we are on the trajectory to meet our ambitious goal by the end of ’25, again, excluding the integration of Tom Ford. This is acknowledging the ever-changing environment with macro and financial markets volatility by assuming a further significant geopolitical, macroeconomic or financial market deterioration.

No further disruption linked to the COVID-19 pandemic and no other unforeseen events. And with that, we are ready to answer any questions you might have. Thank you.

Francesca Di Pasquantonio: Thank you, Gildo. Bruno, we are ready for the Q&A session.

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Q&A Session

Operator: We have our first question. It comes from Susy Tibaldi from UBS. Susy, your line is now open, please go ahead.

Susy Tibaldi: Thank you so much for taking my question. And congratulations on another strong year. On your comments that you had a very good start of the year 2023 and that Q1 is expected to grow double digit with a very broad-based strength. Could you give a little bit more detail in terms of the growth that you’re seeing by region in China? I’m sure you’re seeing a very strong rebound. If there is any way you can help us understand what kind of rebound you’re seeing there? Maybe give some number, it would be quite helpful? And also, you said this strength is really broad-based We are hearing from some of your peers that in the U.S., there is a little bit of weakening in consumer sentiment. Is this something that you’re seeing as well?

And also comment on Europeans would be super helpful. And my second question would be, when you’re thinking about the investment that you’re planning for 2023, is there any kind of step-up in investment that we should think about? Is there any specific areas that you feel like if necessary to keep investing? And if there is any project that you have planned for 2023? Thank you.

Gianluca Tagliabue: Hi, Susy, Gianluca here. So in terms of numbers, we cannot anticipate what we are going to disclose at the end of the month and we disclose Q1. But anyway, I give you the flavor. As we said, we are seeing double-digit growth at a group level. If we isolate since you were asking for a geographical split, if we isolate retail, retail overall is solid double digits. Solid double digit, of course, then becomes double digit when you also take into consideration the Tom Ford the fact, which slows down the number because last year, we were still distributing Tom Ford in Q1. So looking at retail is solid double digit across the regions. We are seeing solid performance everywhere, also in U.S., which I’m fully aware, someone is not seen.

We are not having this feeling. Our performance is solid throughout Q1 in retail for Zegna, mainly for Zegna, mostly for Zegna brand. And so that is the picture I’m going to give you In terms of investment, we expect 2023 to be slightly higher than 2022 in terms of amount. This, of course, becomes with the continuous footprint expansion of Thom Browne. We are seeing some perimeter opportunity in Zegna, which is piece of news because so far, we took advantage of rationalizing the network in Zegna also with the discontinuation of Zegna. Now it’s time for us, and we see the opportunity of expansion in North America, in parts of Europe, in some parts of Europe. In China, still some tactical growth. So we will make a step up in terms of CapEx in 2023.

And as I said before, also the investments in the supply chain. We believe that our supply chain is a strength for us. We are investing — we have been investing in ’22, but we continue investing in ’23 in expanding our internal capacity in some product lines. And so this will become a further driver of investment, together with IT investments in the direction of digitalization, as we have anticipated the tool of configure which will be presented directly to the community in a few days. that will be also in a direction of investment for the group.