Ermenegildo Zegna N.V. (NYSE:ZGN) Q4 2023 Earnings Call Transcript

Ermenegildo Zegna N.V. (NYSE:ZGN) Q4 2023 Earnings Call Transcript April 5, 2024

Ermenegildo Zegna N.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning or good afternoon and welcome to the Ermenegildo Zegna Group FY 2023 Financial Results Call. My name is Arden and I will be your operator today. [Operator Instructions] I will now hand the call to Paola Durante to begin. Ms. Paola, please go ahead when you’re ready.

Paola Durante: Thank you. Thank you and good morning, good afternoon to everyone. And thank you again for joining the Ermenegildo Zegna financial conference call on 2023 full year results. All the materials that were discussed in the presentation and the press release that was sent previously. You can find it on our Group website at ermenegildozegnagroup.com. I’m very happy to say that today with us we have the leadership team of the Group, including our CEO, Mr. Ermenegildo Zegna;, our COO and CFO, Gianluca Tagliabue. And we have also Lelio Gavazza here with us in Milano, CEO of Thom Browne and — TOM FORD; and Mr. Rodrigo Bazan that has connected, I believe, from Los Angeles, but he is also here with us. Before beginning, I need to point out a little few things that are little bit boring, but we need to do it.

We make — during the call, we will make certain forward-looking statements. Our actual results may be materially different from those expressed or implied by these forward-looking statements. Also, I remind you that statements are subject to a number of risk and uncertainties including those described in our SEC filing. Please refer to the forward-looking statements cautionary included at Page 2 of our presentation.

Ermenegildo Zegna: Good morning, good afternoon. Thank you Paola, and thanks to join us in today’s conference call on Zegna Group fiscal year 2023 results. Today, as usual, I would like to give you a brief update on our results from last year, discuss the main accomplishments and project we undertook. And finally briefly comment on what we are looking forward to this year. I do believe that ’23 was a milestone year for the Ermenegildo Zegna Group. We completed the acquisition of TOM FORD FASHION, which has reached our group with a third brand that is perfectly complimentary to our portfolio. On top of this great addition, the Group also achieved outstanding results. Group revenue in ’23 as we shared back in January,. reached €1.9 billion, up 28% and up 19% on an organic basis.

Our adjusted EBIT reached €220 million with an adjusted EBIT margin of 11.6%, 100 [ph] basis points from 2022. And most importantly, our net profit more than doubled compared to 2022. I think it has been a great achievement. I’m also very proud of the progress we made on our sustainability commitments. Caring for nature and the communities around us is a founding value of the Group. And I’m pleased to say that we delivered on the sustainability commitment we set for 2023. Last year, we formalized the adoption of a group diversity, equity and inclusion policy and signed 87% of our employees on topics touching on DE&I. We are on track to reach by ’26 50% of key raw material certified is traced and lower impact. We continued our investment in renewable energy.

97% of energy used in our European operation now comes from renewables. In 2023, we have installed photovoltaic panels on the rooftop of two additional production facility. But it is only the beginning, as I always say, this is the beginning of the journey and we have still lots of work to do. Nevertheless, I’m proud of how far we have come and for what it has taken to get there. Now I want to take a moment to talk about the heart of our business — the three brands in our [indiscernible]. First, Zegna brand. 2023, we continue to build on our successful Zegna One brand strategy globally. As you know, the Americas and EMEA are ahead on the journey, but we are also starting to reap some rewards in other market, in particular China. And one of the market where the journey started later is exactly Greater China.

We do recognize that ’24 still be challenging there due to geopolitical and macro environment, and as we further roll and develop our customer base, but we see important positive signs, especially the fact that demand for our highest end product is strong and improving. We are extremely focused on and committed to this region to further reinforce brand awareness of Zegna as the leader in luxury menswear. Talking now about product of Zegna brand. In February, we launched the SECONDSKIN collection globally, a selected number of SKUs, including leather outerwear and the SECONDSKIN Triple Stitch, our iconic that made the finest leather out of SECONDSKIN. The drop has performed very well in all regions, including China. Looking at distribution, we are even more committed in reinforcing our D2C channel.

We will continue to streamline our wholesale distribution also converting some more brand store in concession. Finally, one very exciting event coming up for the Zegna brand will takeover in April, where — sorry, we will take over Milan in April with event [ph]. During the [indiscernible], we will launch a new Oasi Zegna at Piazza Duomo and present a Born in Oasi book, which gathered a unique vision of our founder. We are doing best at the moment when all eyes will be on our great home city, Milan, [indiscernible]. Next is Thom Browne. In the year 2023, in which the brand celebrated 20th anniversary, Thom Browne revenue reached €380 million, topping a strong 26% compounded average growth rate since the brand became part of the Group. A very nice run, I would say.

But the journey just started and we still have a margin [ph] to do. The brand has huge potential across markets and product to go beyond the €500 million that was my initial target. Finally TOM FORD FASHION, the new join in our Group crown, we do believe that there is a huge potential of TOM FORD FASHION. This confirmed through every conversation ahead with Lelio about the brand cover in the world, whether it is landlords with clients, with luxury experts around the globe. They all agree that the brand has room to develop in particularly linen wear and in leather goods segment. The brand has created an artistic direction is strong. You’ve seen that in the reception of Peter Hawkings collection to date. CEO Lelio Gavazza is here today with us.

He is forming a team, starting with Head — with new Heads for Asia and for the Americas. We’re also making sure that the brand can leverage our Group infrastructure, including our supply chain know-how for both men’s and linen tailoring for CRM and customer engagement system and develop the TOM FORD FASHION store footprint. We have secured some 8 to 10 stores as of this year, and we’ll start with renovating few of them. Before I hand over to Gianluca, let me mention an important project. I’m particularly proud of evolving our Filiera. What is our Filiera? It’s a new terminology in Italia and start to translate in English. However, it’s our fully owned and fully integrated supply chain made of the finest high-end Italian textile platform integrated with unique luxury manufacturing capacity, really unique, a unique project in luxury.

To reinforce this Filiera, we’ve recently approved an important new project in Parma, I would call it a breakthrough project, a cutting-edge center for excellence which will primarily produce men’s shoes and leather goods designed by famous architect Gianmaria, Antonio Citterio, who designed our current headquarter in Milan, the facility will sit on a 10 hectare plot of land and function also as an important research and development training center, including our academy. When full and running, the center will employ more than 300 people, and we produce a significant portion of good shoes primarily for Zegna, but it will also serve the other brands. Let me now conclude by saying that although ’24 will be a volatile year, we remain extremely confident that our path is well traced.

Uncertainties can create amazing opportunities. If you have a clear vision and are able to react immediately and firmly being ready to take [indiscernible] by executing perfectly around the world. I would like to take the opportunity to share with you some of the actions that we have been working on with our management team. Number one, we are enforcing our team talent with some key additions in important markets. We will continue to invest on our brand focusing on key priorities, both in terms of marketing and store opening and remodeling. BTC and CRM, two very important part of our evolution are our mantra. It will be even more in the forthcoming months. For Zegna, for Thom Browne and for TOM FORD, we have to know better and be closer to our customers.

Loyal customers are more loyal in challenging times. And in the meantime, we have to stay tuned to our people in stores. They are our first ambassador. We will continue to streamline our wholesale doors, if anything, even more aggressively than initially planned. Last but not least, we are working on continuing to improve store productivity and sell-through, where we’ve gained a very important step. Let me conclude by reaffirming that our Group is in custodian of our entities, probably is to protect them since we’ve been around 114 years. These are our Group ambitions alongside those committed to you at the recent Capital Market Day, which confirm today. And this is also thanks to the best in region. We have three authentic brands unique Italian luxury Filiera and focused, accountable and responsive management team in united family with 114 years of heritage.

And last but not least, a clear vision that guides our actions. With that in mind, let me turn over to Gianluca that go into the financial in detail. After this Rodrigo, Lelio and Gianluca and myself, we will take your questions. Thank you very much.

Gianluca Tagliabue: Thank you, Gildo. Good morning, good afternoon, everybody. So let me move to Page 13 of the presentation where you find the Group revenues evolution over the past 3 years. Preliminary revenues for full year ’23 were already disclosed at the end of January. So there is no news and therefore, I will not spend much time on this page. Just let me underline the full year ’23 revenues have been in a very good year for our Group with almost 28% reported growth, thanks to a double-digit contribution from Zegna and Thom Browne and from the newly added TOM FORD FASHION segment, which contributed to €235 million revenues. I remind you also that TOM FORD FASHION has been consolidated for around 8 months last year. Let’s move to Page 14.

Before commenting the numbers, I would like to remind you that since 2023, we have changed the way of reporting our P&L, adopting the bi-function presentation versus the previous by nature. We believe that this way to represent numbers not only reflect better the way we look at our business, but also can help you understand more our company. For this reason, in the next pages, I will comment the actual numbers underlying their drivers by each P&L line. Let’s start from gross profit. In 2023, consolidated gross profit rose by 32% to a €1.2 billion mark with a margin of 64.3%. The 210 basis point improvement from last year has been largely driven by a better channel mix as you know, DTC gross margin is higher than the wholesale one, but also by better price/mix and by the scale effect, in particular, in the supply chain side, which helps better absorbing the industrial fixed costs.

Channel mix is estimated to justify about half of this gross profit margin step up. An important point to underline related to the TOM FORD FASHION consolidation. You remember that on April 28 of last year, we acquired for roughly an enterprise value of €150 million cash free, debt free and on the basis of normalized working capital. The 85% of international, the only company that manages the TOM FORD FASHION business under a 20 plus 10 license agreement with the Estee Lauder Companies. The purchase price allocation so-called afterwards PPA of this transaction has been allocated to the assets acquired, including inventories, customer orders and the license agreement itself, generating some PPA-related charges, both at cost of sales and at the SG&A level.

Because of this PPA, in 2023, gross profit we accounted for €15.6 million higher cost of sales related to the step up of inventory value and the amortization of the value allocated toward this backlog. The majority of this 15.6 — €15.6 million charge is actually related to the inventory. This amount will be largely accounted in 2023 financial with a smaller sales in 2024. In fact, this year, ’24, we will account the remaining and last €3 million to €4 million of this kind of charges in the cost of sales. After that this smaller effect in ’24, we will not incur additional costs related to PPA on the cost of sales. Moving to SG&A, they reached in 2024 €901 million with a 47% incidence on revenues about €200 million higher compared to full year ’23.

Let’s dip down on this increase of G&A, and I would like to underline a couple of important factors. The TOM FORD consolidation contributed to more than half, some €124 million to this absolute increase. This amount includes also the royalty fees that TOM FORD pays to order. In addition, it includes the second part of the PPA that I mentioned before exercise and this part is related to the amortization of the right of use of the license agreement, which gets amortized over 30 years. In 2023, for the 8-month consolidation, the license amortization was equal to €2.2 million and in ’24, the amount will be in the tune of €3 million on a 12-month basis. The second relevant item that is important to underline is the impact on SG&A deriving from the acquisition of the Thom Browne South Korean business.

I remind you that since July ’23, Thom Browne started to manage roughly the 17 stores in that market. And as you know, retail generates higher gross profit, but also on the other side, higher selling expenses compared to the wholesale business. On the other side, it’s important to remark that the Zegna segment helped offsetting some of the above mentioned negative effect by contributing itself with a positive leverage on SG&A. Just a final comment for those that might have not known the Group for long, given that this is the first time we report 2021 SG&A expenses. In 2021, SG&A expenses included some €200 million arising from the business combination with the SPAC that led to the listing of Zegna Group at the end of 2021. So that is the reason of this curve, which presented a high number in ’21.

Let’s move to marketing expense. Marketing expense on Page 16 increased to a 6% incidence on revenues in line with the management plan to further invest on its brand equity value. We remember that this 6% incidence is also affected by B2B components within our business, which requires very little or no support at all by marketing, and this is the case of textile and third-party brands that together represent roughly 10% of group revenue. So when we look at 6% incidence, we have to bear in mind that this 10% comes with very limited marketing dollars. Page 17, here is the report of our consolidated statement of P&L. I believe we have already thoroughly commented line by line, the ones above the operating process. Let me make here a couple of comments at this point below operating profit on financial income and expenses and on taxes.

Starting from the financial items. In full year ’23, net financial expenses, including foreign exchange losses. In 2013, they were negative for a combined amount of €36 million versus €49 million negative in ’22. So this €13 million positive swing from ’22 to ’23 arises mainly from three factors: first, lower liabilities from the on ground put option related to better ForEx, this put option is expressed in dollars and related to higher interest rates, which reduced the net present value of the put itself. And this to components more than offset the higher intrinsic fair value of the cost deriving from higher expected results of TOM FORD looking forward in the years to come. The second component that generates the positive swing and positive reduction of financial components is the lower hedging costs that we incurred this year.

And the third, higher returns from financial assets versus 2022. This effect more than offset the financial cost that emerged with the warrant redemption that occurred in the beginning of 2023, which I recall generated a €22 million charge in our P&L. And as information, the financial expenses, which might help also the analysts to model their projection. The financial expenses related to bank loans and lease liabilities under the IFRS 16 rule were this year in the region of total €30 million. I call out the last points of attention, the €3 million negative related to results from investments accounted at equity value, they refer mainly to TOM FORD results in the 4 months before our acquisition and they are related to the deal related costs incurred by the target company before closing.

Therefore, this line is expected to return positive from 2024. Finally, let’s talk about taxes. This year — last year, in ’23, we had a favorable effective tax rate in the region of 20%, which has been influenced by a positive tax ruling and by the recognition of DTA connected to some tax losses previously generated. I can anticipate that looking forward for the Group, we have in mind the normalized tax rate on the disclosures with 30% rather than 20%. Moving to Page 18, the adjusted EBIT metric, which is our key metric in terms of analyzing the performance. As Gildo already commented in full year ’23, our adjusted EBIT reached €220 million with almost a plus 40% increase versus last year, and this was part of our own expectation. Adjusted EBIT margin rose to 11.6% notwithstanding the dilution effect from the TOM FORD consolidation, which for full year ’23, you can roughly estimate slightly higher than 1.5 percentage points about of which — of which about us are coming from the previously mentioned PPA effect on cost of sales.

The difference between the adjusted EBIT, €220 million and the operating profit, €208 million, that is €12 million is referring to adjustments that in the reported P&L are almost entirely accounted for in the SG&A line. Please, I remember again that all this €12 million adjustment do not include the charges related to the PPA because it’s not allowed to have the PPA charges accounted for as an adjusted item. So they are part of our adjusted EBIT. So the adjusted EBIT discounts, the PPA effect good or best — at best on our P&L. Let’s look at the results by segment. Moving to Page 21, Zegna segment. As you know, this segment includes both the Zegna brand, products and the textile division of third-party brands. This generated €1.3 million — €1.3 billion revenues before intergroup revenue elimination that amounts to €33 million, and those are sales of either finished products or textile to TOM FORD and Thom Browne.

And it came out with an adjusted EBIT margin of 14.6%, thanks to higher gross profit margin, a lower incidence positive leverage on SG&A. Both these effects were supported by the strong 25% organic growth in Zegna brand DTC, which has helped to boost our store productivity, as we said in New York by almost 50% up in 2 years, 2023 versus ’21 and was also supported by positive absorption of fixed cost in supply chain and textile operations by the increased volume of business. This important increase in adjusted EBIT margin arises notwithstanding the decision to enhance the marketing expenses for the Zegna brand, which was disclosed in our prior conversations. Page 23, Thom Browne segment. The segment reaches — reached €380 million before eliminations with a 15.5% adjusted EBIT margin.

This good result is linked to the positive performance in both channels with DTC channel at plus 20% organic on full year ’23 and wholesale on a plus 15% organic in full year ’23 after a strong year-end in wholesale with Q4 wholesale delivery that reported a plus 40% organic versus Q4 ’22. Two words, finally, on the TOM FORD FASHION. Page 25, results were in line with the expectations impacted at adjusted EBIT level by the already mentioned PPA and by the royalty fees. It is important to us outline, in particular for 2024, that our priority remains to invest in the business and to set the basis for a successful organization led by the CEO Lelio Gavazza. On the next pages, we summarize some key results of our consolidated statement of financial position, balance sheet.

So let’s look at Page 27 here. I just call out a couple of elements on the line related to noncurrent assets because it is the one that is seeing most of growth. So in that line, the growth comes from the following factors. There is a €96 million right-of-use asset coming from the TOM FORD license agreement. So in the PPA, we allocated at time of closing €99 million of right-of-use assets, which gets amortized over 30 years. At the end of the year, it came down to €96 million. Then there is a goodwill of €24 million related to the Thom Browne South Korea business taken over midyear. And then the rate increase of right-of-use assets related to leases, the IFRS 16, whose growth is mostly driven by the addition of TOM FORD FASHION retail network and related leases within our consolidated revenue.

Let’s go to Page 28, where we commence trade working capital. Trade working capital increased in ’23 to a level of €449 million, 23.6% of revenues, driven by the normal increase in business, but also by our decision, as you have already seen, in the semiannual numbers of ’23 to invest in Zegna and Thom Browne plastics, which are continuated [ph] collections across the season. This investment impacted inventories in particular, in the first months of ’23. And in fact, if you compare year-end inventory and June inventory ’23, they are basically in line. So it means that we have plateaued and now we start normalizing. We have been already started normalizing the spike coming from this one-time investment on continuity collection. In addition, you should consider that the incidence of revenues on vis-à-vis trade working capital has been penalized by a mathematical factor given that the addition of working capital coming from TOM FORD, €52 million is compared to only 8 months of revenues of TOM FORD.

For the future, our goal is to move gradually towards a 20% incidence of trade working capital analysis [ph]. Page 29, you see a new non-IFRS metric that we introduced, also listening to your succession is the free cash flow metric. And let me comment this nice €72 million free cash flow generation, which we recorded last year, largely driven by our improved operating profit results. Last year, CapEx was equal to €78 million, around 4% of revenues, but I would like to reiterate what we already commented in New York Capital Markets Day and the fact that for ’24 and also ’25, our CapEx should increase as a percentage of revenues, slightly above the 5% threshold, given that we are investing in-store openings and remodeling and also in the breakthrough project mentioned by Gildo of the new factory in Parma, actually — this is actually more than a factory, it will be a center of excellence now in creativity, where we will somehow celebrate our skilled artisans that every day produce luxury shoes for Zegna and for the group in an amazing environment which will enhance the workforce welfare.

Finally, Page 30, and this is the bridge of the net financial investments, which starting from a cash surplus at the end of last year lands basically as a neutral net debt to net cash position with a slight net financial investments of €11 million after an incurred investment in subsidiaries and where the bulk of majority of this amount come from TOM FORD FASHION. With this in mind, let me leave the floor to Gildo for final remarks on outlook and current trading.

Ermenegildo Zegna: Thank you, Gianluca, for the clear presentation. And let me complete the first part of this call with some remarks on quarter 1 trend of this year, anticipating a question that I’m sure you will ask us. As you know, we are going to publish quarter 1 revenue on April 23. So detailed inflows and questions on Q numbers should be discussed in that occasion, not now. But let me give you here some highlights to help you better understand trends and actions, which we believe might not have been completely understood. Quarter 1 ’24 revenue result reflects three main trends. Number one refers to our decision taken a while ago but are involved today to further streamline the wholesale distribution, in particular at Thom Browne.

We felt that in the current environment, it was the right decision to anticipate some action that we’ve initially planned over a longer period of time. Secondly, we are seeing some higher-than-expected volatility in Asia, mainly in Greater China and mainly for Thom Browne. For Zegna, the trend in the region largely reflects the one brand strategy, and we see signs confirming that we are moving into the right direction, even if the strategy has yet to be fully completed. For Thom Browne, the trend in Greater China has been influenced by the challenging environment, but also by the need to reinforce the retail organization. On the other side, I have to say that I’m very pleased to see all the other markets for Zegna, in particular the United States and some key markets like Japan for Thom Brown, growing sound double-digit DTC growth, confirming the strength of our brands.

As a result, Q1 revenue are expected to grow in the region of 10% constant ForEx while organic performance is expected mid single-digit negative due to wholesale revenue of Thom Browne expected to be down high double-digit of a very challenging comparison base. However, looking at full year 2024 and considering revenue consensus numbers, I feel confident that they are achievable. And I’m sure we are taking the right actions to deliver them. Regarding our mid-term guidance, as already said, I confirm that this guidance is unchanged and confirmed. Thank you.

Paola Durante: Thank you. Thank you, Gildo. And I leave now the operator to open for the Q&A session. Thank you, operator.

See also 25 Richest Billionaires in Energy Industry and Top 25 Biggest Internet Companies in the US.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today comes from Chris Huang from UBS. Chris, your line is open. Please go ahead.

Chris Huang: Hello. Hi. Thank you for taking my questions. It’s Chris Huang and I have three questions, please. My first question is on the Chinese consumers. I know this is an H2 P&L call, but are you able to provide any color on how the China cluster has so far performed in 2024. The reason why I’m asking about this is that we have been seeing — hearing from some of your peers that trends in March have slowed down after a very solid Chinese New Year. So if you can — and any possibility comment on month-by-month trends, that would be super, super helpful for us. Secondly, on the guidance you provided for Q1, with organic sales growth to be down mid single-digit. Just to understand a little bit more that you provided wholesale for Thom Browne to be down high double-digit.

What kind of level are we expecting here? Just so we can understand better what is the impact from a challenging environment in Greater China? And how much is from wholesale because if I just repeated did the math, if we are assuming mid single-digit up for Zegna to get to mid single-digit down for the Group organically, it means Thom Browne is down around 30% to 35% organically? That’s my second question. And lastly, on EBIT margin. I remember back in December 2023, you provided some new mid-term targets by 2028, which if we kind of look at the CAGRs implies EBIT margin to reach the level of high teens into mid-term. So if we compare that level to the 12% you printed in 2023, can you just share some thoughts on what should we expect in terms of the cadence of margin expansion in the coming years?

Are these targets [ph] likely to be front-end or back-end loaded? Thank you so much.

Paola Durante: Okay. Thank you, Chris. Regarding your first and second question, we will add — we will ask management to add some color actually, such detailed questions has to be then postponed to April 23 when we release the quarter 1 numbers. But for sure, I will ask Gildo and to also our Thom Browne and TOM FORD CEOs to give a little bit of flavor on the Chinese market, which was your first question. Then going into the second one on sale, Rodrigo, I’ll ask Gianluca to do a couple of comments, but I think also on this one, Rodrigo can comment a little bit more, and I’ll leave then Gianluca for the EBIT CAGR, the third one.

Ermenegildo Zegna: So on the call, Ermenegildo on Zegna, but I think that we can add color with Thom Browne and TOM FORD. First of all, we have been traveling quite a bit with Lelio and Rodrigo in the past few months. So I think we have a good grasp of the Chinese market overall. And I must say that it’s challenging, but I think that it’s positive mid-term. Surely, we see less traffic than we used to see. So I think that you have to work more, less transactional, more relationship driven with the customer. I think that our outreach platform is very important to reach out the customer wherever he is or she is. And I think that we are having similar outreach percentages that we have in other countries like the United States, which has been really upfront.

I must say that our rebranding strategy is coming up more and more every month. We have been successful with the drop strategy of Zegna by which is — in the second season by which we have four to five drops of merchandise, [indiscernible] supported by market is supported by visual, supported by event in the store, and we see that every time we do that, we’ve a reaction of our clients in the store. We have created personalized event for high-end merchandise in some of the top cities by selling headquartered people and we had very, very good results. So I would say that from the day of the Zegna where we had an aspirational customer that is partly lost. We have been gaining new customers that are ahead and we are gaining traction more and more with high-end product.

Last but not least me to mention, I think that one incredible weapon that we’ve used around the world and also in China is made to measure by which we often a unique assortment of product that is very helpful in reaching out special customer that wants to feel exclusive in what they were and they’re very picky on the charges. So we do remain positive on China. But as I said, it’s lower in compared to countries like America, in picking up a trend that we will get there pretty soon. Lelio, do you want to add some color on TOM FORD?

Lelio Gavazza: Yes, of course. I ended up traveling last month in China. As you know, China for TOM FORD is still a manageable market because we are mainly focalized in America. And I would say that for us, China in a [indiscernible] market is a great opportunity for us to start with great opportunity has been underlined in the last few months, in particular the conformation of the possibility to expand the brand in the market and this confirmation is tangible with the opening of our new flagship store that is going to happen at the end of June in one of the most important shopping mall in Beijing [ph] and with this location, but as well several other opportunities that we have in China Mainland to opening direct [indiscernible] for TOM FORD.

And I would add that with confirmation of some locations that were a little bit on the question mark in the previous year that has been confirmed by the lender. On top of that, we’ve an addition of a new President coming from one of the top group of luxury, they joined TOM FORD in Shanghai in charge of Asia Pacific and we’ve a massive marketing activity that we started to deploy in the next few months where we really connect the brand with the Chinese consumer aim to drive the nationality as one of the most important nationality together with Americans that are already there.

Paola Durante: Can I ask Rodrigo to comment on China for Thom Browne?

Rodrigo Bazan: Sure. Good morning Chris. I am coming from Los Angeles and returning from Hong Kong, Shanghai, Tokyo. So, clearly, it’s a different environment in China, you still walk the street and it’s busy, very busy incredible market. It’s divided by aspirational clients and very committed clients. We are seeing a fantastic trend when it gets to very committed clients such as yourself and the MTM an event that we did last year, which were going to be repeating later on this year. I come from meeting landlords and visiting our teams. The aspirational client is much more challenging in general for everybody. And we brought in place a new GM at the beginning of the year. We are focusing 100% on the client connection right now and product confidence within all our teams.

That’s starting to pay results. And we have certain stores that are doing really well and some others are more challenging. Still a highly exciting market, and we need to connect even further with the client and have even more product confidence. From an external point of view, landlords are still really committed to continue to grow with us and waiting for us to have more activities in the country.

Paola Durante: Thank you. Thank you. On maybe on wholesale, I’ll ask Gianluca to comment a little bit, and then if Rodrigo wants to provide some more color, feel free to jump in.

Gianluca Tagliabue: So as Paolo was mentioning, it cannot be specific on numbers and figures. I think, Chris, you are pretty good in triangulating numbers. So I let you to make the math. Anyway, I confirm that Thom Browne wholesale revenues are declining, I see high double digits. And this is a result of two main planned factors. The first one relates to a different timing in deliveries. As we anticipated during the full year revenues conference call in January, we said that Thom Browne wholesale deliveries were strong in Q4 compared to the year before. If you remind, there was a plus 40% organic growth in Q4 vis-à-vis Q4 ’22. In addition, Q1 ’23 days of comparison I go by our sequence [ph] close to €70 million over a full year wholesale of €195 million was also particularly challenging.

So we have a Q1 that is facing a strong comparison in Q1 last year and is taking the effect of a strong Q4 last year. So this is the first timing effect. Then there is a second that is not timing, but it’s a structural channel strategy decision about wholesale or selection. Rodrigo mentioned the decision of streamlining the wholesale distribution, especially even more now with some situation of clients facing some credit risks. So I think I asked Rodrigo to comment further about this decision that was taken, we probably have decided to go quicker and accelerate on a journey that was already in the books. So that was — that is no different than what we had in mind, but we just pushed pedal to the medal on this given the context and I invite Rodrigo to give some flavor around it.

Paola Durante: Rodrigo, please …

Rodrigo Bazan: Yes, to give more background, I think we need to include the e-business element, which we all have seen the big shifts and ownerships and even changes, we have closed down certain e-businesses, the relationship we have had for the past years. We have also and we see a significant reduction also on stock being offered on any businesses. Further to that, we made a strategic choice to reduce even further any stock available to those channels. And as Gianluca mentioned, is as we’ve been growing our DTC channel for the past 8 years from four direct operated stores to 90 operated stores. We felt it was very more important to be confident on reducing any stock that could compete with our own DTC. So is this a choice, obviously, a challenging wholesale market around the globe.

But at the same time, wholesale remains a great channel. [Indiscernible] we have wholesale with a fantastic event for DAC and celebrities with an exclusive collection in Los Angeles, of accessories and clothing. And also, we continue to believe it’s an important channel that we need to make a choice on the volumes that we put in wholesale. So as Gianluca mentioned, we made a strategic choice to further accelerate any reduction that we felt that was necessary to further strengthen our business. which is a short-term pain, but a long-term gain.

Paola Durante: Thank you. Thank you. And maybe there was a third question on the EBITA CAGR trajectory from Chris.

Gianluca Tagliabue: I recall something that we mentioned, but I make it more explicit. For TOM FORD this year is a foundational year. So we are building structure, people, opening stores and as it’s normal, the first year of a store is not the second year in terms of performance. So we are not seeing a linear factor of growth of EBIT, we expect it to have an acceleration. We have said that we have a couple of years of over investment in CapEx, which translates into depreciation. We have the fact that TOM FORD will be consolidated 12 months and not 8 months, of course, then we don’t have the PPA this year. But still, we see that the growth at our EBIT more intense in years after than — than in 2024.

Paola Durante: Okay. So we can move to the next question, operator. Its [indiscernible] fine Chris if you’re running [indiscernible]. Operator?

Operator: The next question comes from Anthony Charchafji from BNP Paribas. Anthony, your line is open.

Anthony Charchafji: Yes, thank you. Good morning. It’s Anthony Charchafji …

Paola Durante: Hi, Anthony.

Anthony Charchafji: … from BNP. Hi. Okay. I have two questions and thanks for the good — yes, for the good description before. Just one on current trading and the remaining will be on the margin. So just if you can give us a bit your thought on the U.S. market in 2024.

Paola Durante: Sorry, Anthony, I don’t know if it’s our problem, but we don’t hear you so well.