Ermenegildo Zegna NV (ZGN) 2022 Q2 法說會逐字稿

Hello, everyone, and a 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's 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 the 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 update and discuss strategy, guidance and mid-term ambition. Gianluca will spend time going through the numbers 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 statements 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 2 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.

Yes. Thank you, Francesca. In the [Northwest on] from (technical difficulty) in Italy, where we held 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 a year where we performed quite well, 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 this result, both in terms of revenue and in terms of margin.

And I must say that one of the key milestones 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 will be an incredible step forward to amplify our One Brand strategy and target new customers around the world, and enhancing the value to over centennial brands, Zegna and Real Madrid.

If you move please to slide number 4, there are some numbers I want to share with you. And you can see from the slide that our performance has been quite remarkable. We have grown the top line by 21% year-over-year, reaching revenues of over approximately EUR730 million during the first half. Excluding [Mainland] China, which was disrupted by COVID-19-related lockdown, [is the] closure, unfortunately, from mid-March till end of May, our growth rate was remarkable, 53%, with US and Europe doubling.

Our adjusted EBIT margin ticked up by 20 basis points to 11.3%, despite the planned step up in cost and the unfavorable country mix from the weaker Greater China region. [We've been paying there] the cash surplus of EUR105 million despite the investment in the One Brand loans and some cash outflows, which will be described later by our CFO, Gianluca.

If you then go to slide 5, that takes you through our core project that you know very well, and before we go to slide 6, which gives you the key highlights of our strategy. So, let me focus first on the Zegna brand and then lately, Rodrigo, the CEO of Thom Browne, will take you through the highlights of the Thom Browne brand.

And I think that as far as today is concerned, we are keep making progress on our One Brand strategy and on Our Road to iconicity, which we believe firmly are the foundations of our future growth. As you know, the One Brand strategy for Zegna was kicked off in November 2021, and we surely have accelerated the (inaudible) 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, it was launched in stores in July, 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 both meet the new changing needs of our customer. And thanks to that we are adding new customers, I think it's very good news.

I think that this change favors some interesting dynamics. Number one, a richer product [content]. Number two, positive pricing dynamics. Number three, higher sell-through in the store, increased double digit with exception of 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, as said, taken a great step 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 -- of 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 [hearing] will be an additional amplifier of our brand strategy.

And our Oasi Cashmere product rollout, which it's a very important iconic project for us, is an epic step in our Road to Traceability and in the world of sustainability, as in our rebrand in our store, representing 20% of our retail fall/winter purchases for our store. And so, I think that this is a road into meeting our ESG strategy that we presented at Capital Market Day [endorsing Zegna] a few months ago.

I think Thom Browne has some good news to tell you about. I'll let Rodrigo take you through 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 are 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 closed 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 in 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 staged 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 Fashion Week and we got a very significant visibility and success of that.

Thom Browne, a few weeks after, was back in Paris after more than two years with possibly one of his best men's shows in the last 10 years, which generated rave reviews from fashion critics, as well as outstanding exposure to consumers globally through fashion social media.

During the show, Mr. [Belhari] presented Spring 2023 men's collections, but he also took the opportunity to stage a performance for which he presented Spring 2023 pre-collection, the first collection for women's, and there was effectively no 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 talents dressed exclusively at Thom Browne such as Lizzo, Kourtney Kardashian, Travis Barker, Oscar Isaac, Adrien Brody and 10 others of such great talent all wearing Thom Browne at the Met Gala event.

In [the role of import], in terms of operations, we only added one directly operated store in 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, if we account for also franchises in shop-in-shops, we'll 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.

Actually back to Gildo.

Sorry, (inaudible). I think it's still my turn. I think that I will take you through another important chapter of our story, which is the Made in Italy platform. I say that the Made in Italy platform was, as you know, affected by the COVID problem, in particularly (inaudible) explained that fact that we came out very, very strong. And we have seen a tremendous growth in the first half of 2022 with Textile up 55% and third party brands up 44%. And hence the [later quarter] going forward. This means they are really working to capacity in our supply chain plans, which is very, very good news.

ESG, this is a really important chapter of our history and our future. That means responsible growth, as we had for over 112 years. And as 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 few months.

In July, we announced a number of sustainability linked financing agreements. And in August, we submitted our target to SBTi and on green mobility that is [now our car fleet]. We have approximately 25% of the journey to reach 100% fully electric or plug-in hybrid corporate vehicles by 2025. So, we are updating you on this step-by-step progress on [the SG].

On slide 8, I would say that [confirm] highlights, some of the key points in the first half. And this happened despite some disruption of the global environment. And I must say that, our global revenue, excluding Greater China, shows restoration also in second quarter 2022 with a growth rate of 59% from 48% in first quarter 2022.

The good news is that we delivered [strong] profitability with 11.3% of EBIT margin, despite the planned increase in cost and the deployment of the One Brand strategy and operational improvements have been driving revenue growth and profitability. On the back of our first half and off a 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 2022, which I will talk more in detail on the call.

And in order to continue the good execution of the [one-off] strategy, we are -- we believe that we are on track to achieve the mid-term target shared at the Capital Market Day in May, which, as you recall, were a revenue of EUR2 billion 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 productivity in the store, it's a real priority.

Thom Browne, I think that we are going to [really] 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 are working on a lean supply chain, an improvement on the time to market, and we will leverage on our scale, which is becoming more interesting. And I think that we will surely make sure to look whether there are other opportunities to increase our specialization in new fibers [or a new product development].

And last but not least, a word on [dialing the] 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 this new application is getting better and better, we are getting better and better outreach (inaudible) 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%, EUR729 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 as a positive trend on domestic consumers, we see a return of tourists with a particular rebound in Western Europe. Second, EBIT, adjusted EBIT was EUR82.7 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 segment was up 19%, but was up also in terms of margin 80 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 EUR21 million for the first half of the year, down from EUR32 million of last year. So how come the profit is down given that the EBIT is up by EUR[16] million?

This is a result of a EUR20 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 EUR28 million this year, which is booked in the financial expenses, compares with a favorable 2021 financial income reported in the first half of last year when we purchased the 5% of Thom Browne at the value which was lower than the liability that was in the books.

Our cash surplus was EUR103 million at the end of June versus EUR145 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 the [three to two] months of lockdowns in China. So some of the inventory of China we will carry over [full] price in the coming months in order not to create any disturbance on the margin.

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 reflects the discipline and the focus on store footprint optimization. It was a cash move, not a 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 [we believe] we can consider [temporary].

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. Both Zegna and Thom Browne enjoyed continued growth US, Europe, rest of the world, more affecting the COVID new measures in Greater China. For 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 customers 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 a result of the collection of Zegna, the reposition 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 US. 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 third-party brands, which I remember fall under the Zegna segment. And those segments continue to contribute strongly to the growth, plus 30% in the first half, now close to EUR185 million with a growth at 360 degrees in all the lines, with women 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 anniversarying 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, the spilt by geography, revenues increased significantly. As I said, with all geographies, except for the reasons we'll explain Great China 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 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 are seeing it continuing in Q4 [through] to-date with a good July and August. In particular, Thom Browne DTC, we can call out that rebounded 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 in a positive territory compared to the first half of last year. Zegna brand 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 in 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 also here you have 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 products 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 new 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 than 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.

Wholesale trends, we are seeing a good acceleration in the second quarter, 46%. There has been no change in the timing of delivery. So, this is business driven and when you see that this is for Thom Browne. The wholesale sales for Zegna, minus 3%, reflect the cancellation of Russian orders and the start of fall/winter 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, EUR83 million, up EUR60 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, also on the industrial part, because we are running the fab factories at full capacity, productivity improvement in the stores in terms of euro per square meter.

These all more than offset two things. One, the unfavorable country mix, because, of course, China is a positive addition to our margin, and going down was a detriment and the anticipated, not the surprise, step up in central costs related to listing and the marketing dollars that we are 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, EUR51 million adjusted EBIT, a margin of 9.2%, up from the 8.4% of the last year. Of course, the top-line 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, you have 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 a normal situation in terms of exporting, making a conciliation of reported to adjust. I think 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 EUR28 million in the first half of this year, 4%. Revenues we expect to land this year more in the region of 5% than 4%. So there is -- Rodrigo was mentioning 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.

For the year, we should have in mind more 5% than 4%. And on the trade working capital the [phenomena], 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 impactful [hurt] in terms of obsolescence. I move to page 26, giving the word to [Gildo].

Okay. Thank you, Gianluca, back 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 fall/winter 2022 and spring/summer 2022 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 an adjusted EBIT margin in the range of last year's as top-line 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 an 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 the 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. US and 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 a double-digit number.

Thanks to what Gildo said, we now have the orders also on the Spring 2023, we have the full collection to be delivered of fall 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 bottom line 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 market and central costs as really a demand. So, we stick to an adjusted EBIT margin in the range of last year's for this reason, for the one up -- one-time step up of these costs.

This I think just concludes 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. We have lots of time for Q&A. Operator, can you please open the Q&A session? Thank you.

(Operator Instructions) Susy Tibaldi, UBS.

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, which is very helpful. 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 if you have seen any change at all in the consumer behavior that would suggest that something may be starting to become a little bit more fragile.

Secondly on the outlook for this year. I wanted to, again, ask a little bit about your assumptions. Because if you -- in the H1 it was growing very strongly at over 20%, and so your top line, I think it's seems [flattish] to a 10%?

But you mentioned an acceleration for Thom Browne in H2. You have very strong visibility now on order books. So, it does seem like it is a little bit conservative, your [subscribed] 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 too have been very strong.

And then lastly on marketing, can you specify again what kind of marketing you expect for this year? And if 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 also this question is 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, Susy.

Yes, sorry. Thank you (multiple speakers).

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

Listen, on China it's very much what we said, [the closing of] this 2.5 months of lockdown, could not give us exactly the [parts on the rules earlier]. And so, I think it's premature to draw a conclusion even though we see a positive trend (inaudible) this way. However, I can talk more deeply on both North America -- United States, North America and Europe, and in particular (inaudible).

Listen, we have seen an incredible attraction by the current (inaudible) customer and also by a few number of new customer. They just want to shop for newness or they just want to change the (inaudible. And so, I think that what we have it seems to please them. I think there's more general (inaudible), which is the last translation of our luxury leisurewear, [we still believe that]. And I think that they are attracted by the (inaudible), not simply by the product and by the original material in 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 that Americans are travelling again, particularly in Europe, I think surely has a -- is beneficial. The strength of the dollar and the fact that Americans are back in Europe, and I'm talking about the (inaudible), in particular the (inaudible) Americans that really have a Shortening (inaudible).

And in terms of the tailoring side, I must say that we are off to good start. It seems that as business people are going back to the office, they have to [report at work]. So, [at least not] in particular in the last couple of weeks, a good traction on continuing. [I'm sure it's nice], which is quite interesting. So, I must say that all-in-all we are [off] to a good start and we are watching carefully where these dynamics will lead to for the fall/winter in China.

Last word on [EMEA], I mean Dubai is on fire, it's unbelievable to see, even though we are in the low [part of the season], I mean, how tourists or even business people are [shadow] shopping. So, we are in (inaudible). Again, we are doing better than our expectations. So, overall a positive trend. And we think that what we're offering for fall, 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 and 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-term -- mid-teen guidance on Q4 in China without giving detailed numbers, but the underlying assumption 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 a next call that is 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 of 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 have put on hold, of course because we didn't amplify anything since restrictions were up and running.

So, we will start amplifying heavily now, from September, with the Oasi Cashmere campaign [as of now] with Real Madrid. So, the journey of spending the extra 1 point is not changed and will be finalized next year with a 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 a similar margin. Again, as I said on the revenues, the two things are very combined. If Q4 in China is different than our assumption, we might have different revenues and different margin on the bottom line. But this is I wanted to be explicit on what's behind.

On the other side, there is no assumption. It's a fact we will have the step up in marketing, actual money and also some basis points. And we have the step up on central costs, which of course are related to being a corporate company and all the compliance that is related to [New York].

Susy, does that answer?

Yes. It was very clear. Thank you so much to all of you.

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

John Guy, Jefferies.

Thanks very much. Ciao, Gildo, 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 that would be great. Thanks.

Thank you, John.

Let me start -- it's Gildo. Hi, John -- with the last one, and then I will leave to Rodrigo on Thom Browne and to Gianluca for the lockdown in the same part. Now, the Made in Italy, I think this is 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 results are quite exceptional. I mean, 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 all material on the site, because there are textiles that they've not bought forward raw material and they are in trouble, that's why the long lead of the supply chain or delayed delivery. So, we are very thankful to have the full control of the supply chain in particular from the textiles.

And the fact that we have a diversified textile base (inaudible) us to be very creative in the (inaudible) we want to use. And it's no more seasonal, I mean they are seeing it in winter, especially in summer. So, (inaudible), the point I'm making is that we want to strengthen the chain.

If we are filing -- actually we are looking, it's more [likely] to be added to the textile supply chain in order to reach scale at the [platform] we are going to do so. I'm telling you that we are working on something -- small things, but we won't describe the chain.

On the other side, we are increasing our [parts of] probably in Italy, [we see] Made in Italy becoming a brand. And the fact that we are -- raised our luxury, if you want, contents of our product, maybe there is -- becoming [more than that]. If you compare Made in Italy outside, potential acquisition, we keep our ears open and eyes. But I don't have any comments related to that. So, overall, strength in Made in Italy, yes. And we are watching to see what could be interesting to our platform.

So, the first was on markdowns. So, I confirm you that our [forecast] to 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 of 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 the composition of (inaudible) and Rodrigo will give the answer.

Yes. If you want me to address the space contribution to Thom Browne, it's actually limited because, as we introduced 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 or shop-in-shops and we're going to be in roughly 100 by the end of this year.

So, there is a limited contribution of square meters of additional stores, we're not changing our store format or store model, retail model. But we are looking for a much more significant growth of clients. And we're much more focused on the growth of clients, that's why client value management is 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 top line. 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 there is a step up, and there has been some step up again 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 a known listed company. So, we didn't have some costs like the insurance of the directors [enough to show] 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 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 trait for the next coming years.

Thom Browne is adding now 52 stores. Definitely there 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 is more renewal and rebranding. You need to consider that so far we have rebranded with a new logo 130 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'll 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 small lines.

Grazie, (inaudible) Gianluca. That's very clear. Thank you, Gildo.

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 October 27. Have a good day and a good weekend and relax.

Thank you, bye-bye.

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