Prada SpA

HKEX:1913

Earnings Call Transcript 2022-Q4

[Operator]

Good day and thank you for standing by. Welcome to the Prada Group Full Year 2022 Results Presentation. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today's conference is being recorded.

I would now like to hand the conference over to Mr. Andrea Bonini, CFO. Please go ahead, sir.

[Andrea Bonini, Chief Financial Officer]

Good afternoon, everyone and thank you for joining the Prada Group's full-year 2022 results conference call. This is Andrea Bonini, Group CFO. And I'm delighted to be with you again. Alongside me today is Mr. Patrizio Bertelli, Executive Director; and Lorenzo Bertelli, Marketing Director and Head of CSR. Also, I would like to introduce our new Group CEO, Andrea Guerra who joined us at the end of January. Mr. Bertelli will start today with 2022 highlights, followed by Mr. Lorenzo Bertelli, who will provide an overview of our marketing and communication activities and the Group's ESG progress. I will then provide an update on our financial performance for the past year, followed by Mr. Guerra, who will talk about priorities for 2023.

With that, I will hand over to Mr. Bertelli.

[Patrizio Bertelli, CEO & Founder]

Good afternoon and welcome to the presentation of the financial results for the year 2022 of the Prada Group. First of all, let me welcome our new CEO, Mr. Andrea Guerra and thank him for acceptance of this commitment. During the presentation, Mr. Andrea Guerra will illustrate our priorities for the current year.

I would like to start by giving you a summary of the progress we've made in 2022. Despite the complicated macroeconomic and geopolitical situation, the Prada Group has obtained excellent results. Thanks to the great strong identity and appeal of its brands and through a careful execution of the strategy. Sales results are the outcome of the commitment and dedication of our people.

During Q4 of 2022, the Prada Group was the only luxury company with its two main brands to rank amongst the top five in the list ranking. Prada was ranking first and Miu Miu was ranking fourth. Miu Miu was also recognized as The Brand of the year. We are satisfied with the growth of Prada and Miu Miu. This is an organic growth, which is strong and top quality growth, which extends over all product categories and all markets with the only exception of China where lockdown has had a major impact. We reached with a lot advance the medium-term profitability objectives we had given ourselves at the Capital Markets Day in November 2021 and we also get near and near to the remaining revenues objectives and made concrete steps forward on the ESG commitments we have communicated at the Capital Markets Day. We accelerated investments in renovating our retail network, our technology infrastructure, and production supply chain to consolidate our manufacturing excellence.

Finally, 2022 was completed with the appointment of Mr. Andrea Guerra, and Mr. Gianfranco D'Attis, respectively, as Group CEO and Prada Brand CEO. Their joining mark fundamental change in the Group's governance in view of the continuous evolution and facilitation of generation handover. Mr. [indiscernible] and myself are still fully involved in the business and we're very happy to be able to contribute to this new phase in our development. Strengthening the organization will allow us to accelerate the execution of the strategy and to continue along the stable and sustainable growth path we have.

2022 marked a sharp increase of net revenues, i.e. 21% for a total of EUR4.2 billion. This result is the outcome of the excellent performance of the retail channel in all product categories with an increase of sale of 24% at constant exchange rates for a total of EUR3.7 billion. Profitability also posted a major growth and the Group achieved a gross margin of 78.8% and an adjusted EBIT margin of 20.1% for value of EUR845 million. Net financial position is positive by EUR535 million. Hence, we have achieved the profitability objectives in advance and we are very close to the following revenue's objectives that the Group has determined for the medium term.

Let me now give you an update on the Prada brand. Prada has recorded all around organic growth much higher than the market average. Thanks and driven to -- driven by full-price sales. During the year, we have implemented over 100 store renovation projects and we kept optimizing merchandising and client driven activities, thus improving customer experience.

All product categories have been growing double-digit, thanks to the performance of new products in classics. We also launched with a lot of success the Eternal Gold, the first collection of jewelry in gold recycled 100% and the Prada Paradoxe fragrance. Let me seize this opportunity to welcome officially also Mr. Gianfranco D'Attis, in his capacity as the CEO of the Prada Brand and Mr. Gianfranco D'Attis brings with him a significant majority experience in luxury and retail.

Miu Miu also posted important results last year by benefiting of growing appreciation and brand awareness. This is the outcome of everything we did to strengthen the brand's identity of what we did on products and the stores [indiscernible] customer experience. Products were really appreciated in different categories like the Wander Bag, the Ballerina shoes and the Mini-skirt from the runway show of spring-summer 2022 together with successful events. This all strengthened our relationship with customers globally.

Revenues -- retail revenues grew by 20% with good acceleration in the second half of the year. All product categories grew double-digit and the brand has reached net revenues of EUR489 million.

Let me now give the floor to Mr. Lorenzo Bertelli who will illustrate the main market and sustainability initiatives. Thank you.

[Lorenzo Bertelli, Marketing Director and Head of CSR]

Thank you and good afternoon. Over the past year, the Group has made significant progress across marketing, communication and ESG. Our focus has been on enhancing the strength of our brands and their unique diverse identities allow us to engage with our audiences and lead in fashion and culture. All these effort have had a clear impact on elevating our position in the market and deliver excellent brand momentum, both for Prada and Miu Miu.

In Q4 2022, Prada Group was the only luxury company to feature its two main brands within the top five of the Lyst Index, with Prada ranking first and Miu Miu fourth. Both brands also made significant improvement in website traffic and search effectiveness. We’ll remain focused to maintain the high performance.

Prada has had an outstanding year. We have maintained and extended the power of the brands, further strengthening its awareness. Over the past year, we unveiled two highly successful launches with Prada Eternal Gold and Prada Paradoxe, both iconic and disruptive. We presented the first 100% certified recycled gold collection with 100% traceable diamonds, delivered through the Aura Blockchain Consortium platform. The campaign future recognized personalities including Amanda Gorman, who perfectly embodies our values and commitment to sustainability. Likewise, Emma Watson have been selected for the launch of the new fragrance Prada Paradoxe, generating strong visibility. The bottle for Prada Paradoxe is also refillable allowing for less packaging material and this lie with our responsible choices. It was elevated on our already successful Prada talent strategy blending local and global clients for increasing relevance.

Moreover, events throughout the year continued to deliver exquisite experiences across fashion, art and music. We were proud to be the first luxury brand to host a physical runway show in China in 2022 repeating our Men's and Women's Fall 2022 collection. This in addition to our Prada Mode and Prada [indiscernible] in Dubai, Tokyo, and Miami, respectively.

Moving on to Miu Miu, the brand has been under the [start] (ph) over the past year and as a result of the strong brand identity and significant growth. Miu Miu was named Brand of the year by Lyst and brand searches on Google increased by 34%. From a product perspective, we have been able to successfully balance the iconic part of the brand with its newness. Our highly successful spring-summer 2023 show contributed to boost brand momentum with the Miu Miu mini skirt and ballet flats continue to be the most celebrated products by industry and celebrities alike.

At the same time, we are focusing our brand heritage in leather goods. The Wander Bag highly appreciated by the market combines a new iconic material, the matelasse leather with a new product shape. We design local activation engaging events to connect with a growing Miu Miu community leveraging on existing successful formats like Miu Miu Select, Miu Miu Club and Miu Miu Women Tales.

Customer experience is a constant priority for us. In 2022, we especially focused on ensuring we're in constant dialog with our clients to develop long-term relationships that go beyond our one-off purchase. We've done this by combining significant technology improvements alongside what we call the Human Touch, an element which remains fundamental within our proposition.

We have put our Client Advisors at the center of our client journey and have been equally focused on improving interactions, while using digital tools to maximize traffic and commercial performance in store. We'll continue to invest in delivering tailored engaging experience to our clients, as well as putting greater attention to personalization across different touch points, so that we can enhance loyalty and lifetime value.

When we set out our ESG strategy last year, we said that our purpose is to be the driver of change. This is a bold ambition, and it requires action at every level of our business. We started by building the right foundation and strengthening our governance structure. We have established a Sustainability Committee, which oversees the implementation of our ESG strategy and drives forward progress on strategic objectives, such as climate change, mitigation and DE&I.

We have also formed an operating committee made up of leaders from across our business to help the key departments with the resource they need to accelerate progress against our goals. And we have ensured that the right policies are in place with updated code of ethics and anti-corruption policy, a new policy on Human Rights and Suppliers Code of Conduct and then open our Whistleblowing platform. Our focus is facilitating the progress and deliveries of our ESG ambitions across all three pillars of our strategy.

We continued our work to reduce the impact of our operations excluding Scope 1 and Scope 2 emissions. We're investing in renewable energy, participating in Collective Virtual Purchase Power Agreement, project launched by the Fashion Pact that will help support the adoption of renewable electricity by investing the new green power infrastructure in Europe.

We founded the Re.Crea Consortium to manage products end life and support secularity in partnership with other prominent Italian brand. Creating an inclusive culture is another strong commitment with our sustainability journey and we are ensuring that the Group continues to attract and retain a diverse range of talents.

Following the internal survey on DE&I, which I mentioned at half-year results, we are developing a robust diversity, equity and inclusion roadmap that will be -- to implement in the coming months. We will keep investing in training and education programs on sustainability for our employee long-term to increase awareness and build an open dialog. We will also continue conversation externally through strategic partnerships, such as the Dorchester Industries Experimental Design Lab with Theaster Gates to support and amplify the work of diverse desire across the creative industries.

We launched a partnership with UNFPA, the United Nations Sexual and Reproductive Health Agency to provide training program for young women in Ghana and Kenya. The project aims to offer participant valuable knowledge and the practical skills, as well as access long-term employment opportunity in the fashion industry.

Culture is incredibly important, to us as a business and to extend it to sustainability. I'm particularly proud of the work we're doing with UNESCO on Sea Beyond which has launched further educational project this year, investing in future generation, Ocean literacy, so that more young people can understand the importance of the sea for life on our planet. There are many areas where there is still much more to do. But I'm pleased that the past year, we have challenged ourself to embed sustainability in the heart of our business. I am confident, we will continue progressing further against our ESG strategy.

I will now hand over to Andrea Bonini.

[Andrea Bonini, Chief Financial Officer]

Thank you, Lorenzo. I would like to start with the key financials. Slide 15, the Group reported net revenues of EUR4.2 billion, up 21% versus fiscal year 2021 at constant FX. Exchange rates had a positive impact on net revenues of 3.5 percentage points or circa EUR117 million for an increase of 24.8% at current exchange rates.

Retail sales for the period totaled EUR3.7 billion, up 24% versus fiscal year 2021 and plus 45% versus fiscal year 2019 at constant FX. EBIT adjusted reached EUR845 million in fiscal year 2022, with margin of 20.1%. This is a marked improvement versus the 14.8% of fiscal year 2021. EBIT adjusted excludes non-recurring income and expenses of EUR69 million in fiscal year 2022, the majority of which related to write down of non-current assets in Russia.

Net income stood at EUR465 million, an increase of 58% versus fiscal year 2021. Net operating cash flow reached EUR696 million, resulting in a significant improvement to our net cash position which at year end stood at EUR535 million.

Net revenues by channel, Slide 16. Retail sales growth continued to be high quality and organic in the period, up 24% versus fiscal year 2021 at constant FX with positive contribution from both average price and full price volumes. Trend was strong in both semesters, looking at the second half by quarter, there was a deceleration, primarily driven by China, but growth remains very solid. Year on year Q3 was plus 32%, and Q4 was plus 14%. On a three-year stack, Q3 plus 59% and Q4 plus 44%.

Online sales continued to perform well, delivering double-digit growth and penetration remain stable, due to the strong performance of the physical channel. On wholesale, we kept our approach selective with revenues from independent clients growing low single digit. The DFS channel was negatively impacted by COVID restrictions during the period. We saw a sharp acceleration in growth from both fragrances and eyewear with royalties at plus 55% year-on-year.

Retail sales by geography, Slide 17, the Group performed remarkably well across all key geographies excluding China due to the impact of COVID restrictions. Asia-Pacific region declined by 2% at constant FX versus fiscal year 2021, but returned to growth of plus 3% in the second half, thanks to continued solid growth in South Korea and Southeast Asia,, which compensated the slowdown in China for Q4. Year to date, current trading in China is positive and very encouraging. Strong performance in Europe with year on year growth of plus 63% at constant FX, driven by local consumption and uptick in tourism.

For the Americas, year on year growth stood at plus 22% and plus 106% on three year stack. Growth in the region moderated to plus 9% in H2, primarily due to increasingly strong comparatives in outbound tourism and indeed the North American cluster continued to register very solid growth. Japan reported an acceleration in the second half. Thanks to the return of tourism, which added to continued local demand. And lastly, Middle East delivered consistent growth throughout the year.

Retail sales by product, Slide 18. All product categories registered strong growth. In leather goods, further enrichment of the collections drove sustained double-digit growth in both semesters. Performance was well spread across new products and classics. Strong sales trend in ready-to-wear, which registered plus 27% growth at constant FX versus fiscal year 2021 and also in footwear with plus 29%, driven by both lifestyle and formal collections.

Retail sales by brand, Slide 19, Prada, which accounts for 86% of our retail sales continued to perform strongly, delivering 25% year-on-year growth. This was underpinned by an excellent performance across all categories and growth was well-balanced between gender and age groups of our clients.

Miu Miu showed a sharp acceleration in H2 closing the year at plus 20%. Thanks to the brand momentum and to the introduction of successful products in all categories. At Church's, in the second half, we implemented a business organization from manufacturing to distribution, aimed at further integration and higher productivity. We are confident that these actions will strengthen the business going forward.

Gross margin development, Slide 20. Gross margin reached 78.8% in fiscal year 2022 showing the benefits of the Group's investments in manufacturing infrastructure and capabilities. The improvement of 310 basis points on the previous year was mainly due to average price, channel mix and economies of scale, which more than offset the impact of cost inflation and slightly negative FX hedging impacts as well.

Operating expenses, Slide 21, OpEx on net revenues declined from 60.8% in fiscal year 2021 to 58.7% in 2022, a 210 basis point improvement. At constant FX, OpEx increased by 17% driven by the variable component, marketing investments and store events, increased labor costs and decreasing COVID contributions. As already mentioned at the first half results, there is an element of post-COVID normalization in the growth of the fixed OpEx component, such as restart of retail events, travel, and others, which we expect to moderate this year. EBIT adjusted increased by 69% to EUR845 million with the margin improving by 530 basis points to 20.1%.

Slide 22, CapEx in fiscal year 2022 was EUR276 million as we accelerated investments in retail, IT and our industrial infrastructure. Over the period, we managed around 170 renovation and relocation projects which accounted for circa 80% of the total retail CapEx. Excluding retail, of the remaining EUR107 million, EUR43 million related to industrial CapEx and EUR53 million was IT CapEx. We plan to further accelerate investments this year.

Net operating working capital, Slide 23. Net working capital increased in absolute value by EUR89 million for the inventory and slightly declined as a proportion of fiscal year 2022 net sales to 17%.

Net financial position, Slide 24, the Group has a strong balance sheet with a net cash position of EUR535 million at year-end 2022. The Board of Directors has proposed a dividend per share of $0.11, which would result in a total dividend of EUR281 million with a payout ratio of circa 60%.

With that, I will hand over to Andrea Guerra for final remarks and 2023 priorities.

[Andrea Guerra, CEO]

Congrats, Andrea. Thank you. And I'm really happy being here today with all of you. A few weeks, I have joined the Group, obviously, I'm so happy being here together with the best [indiscernible] the Prada family and celebrating first of all the fantastic years achieved in 2022.

Obviously, I'm so happy that I have joined the Group in such a wonderful time. It's a time of evolution. It's a time of great energy I found in the organization. And I would rather say, it's also a time of great health of our main brands, and I would say that that is a great part of our duty to make sure that every day, our brand portfolio becomes day by day more desirable. I think that that is our main job and this is what happened during past years.

We need to really being able to make all this unbelievable work and effort done on brands and creativity, we need to make this work better in our retail network and in every day of our relationship with our consumers. Prada on one side, Miu Miu on the other side, with their ingredients, with their footprints, with their roots, both in their worlds, I think we have a long highway in front of us.

We need to pursue retail excellence. We need to build more frequent and meaningful connection with our clients. We need to have as many people talk about a more holistic 360 degrees approach. We need to really work and make the unbelievable creativity of this Group work even better on the floors of our retail.

Obviously, our consumer is a 24 hours job. We need to accelerate on our digital approach, on our omnichannel approach, and this, I think is something that has been a huge change in the past four, five years, and I think, we are at the beginning of a journey -- of a journey of really being able to serve our clients wherever they are and in whichever attitude they are. Undoubtfully, if I had one mission for this year is store productivity. That is something that we will have to work upon and that is where we have the most space.

I think that what is really important is that we constantly give to consumers what they are looking for from Prada and Miu Miu, there is newness on one side, there is our ability of animating products that we have already in the market. So it's really doing the easier part of the job, having the brands where they are, having the store's infrastructures where they are, having the amount of creativity we have in the company. Now the easy but the everyday job we have to do is to make this even better in our retail, and in the 24 hours of life of our consumers.

On the other side, we are in a journey of growth, of evolution, of expansion. We have grown at healthy rates in these past years. We have to really be very careful in creating the new pillars of growth and infrastructure of our company in terms of organization, in terms of IT, in terms of industrial footprint, supply chain, so there is things we have to do during 2023, there is things we need to do to plan in 2023 in order that we will be ready and solid in the years to come.

The year started well, finished well and started well. We know that this world is a world of constant and unique surprises. So we are ready for that. We are adaptive, we are agile, and on the other side, I think, we are also pretty vigilant on how we are monitoring and addressing our cost base and our capital allocation.

One of the good news is that, China is back. Chinese are also starting to be back in some of the Asian regions. So on one side, we look to 2023 with positive eyes and on the other side, we also know that behind any angle, there is uncertainty, because that's the rule of the game in this 21st century.

Having said this, I will be so happy to talk to all of you in the months to come. And on the other side, I will hand it over to Andrea again for final remarks, and starting the Q&A.

[Andrea Bonini, Chief Financial Officer]

Thank you, Andrea. Before we conclude the presentation and start the Q&A, I wanted to update you on an upcoming change to our approach to financial reporting. As of this year, the Group will be introducing Q1 and Q3 revenue updates. Q1 update will be on May 11.

That concludes our presentation and we will now hand over to the operator for Q&A.

[Operator]

Thank you. [Operator Instructions] Thank you. We are now going to proceed with our first question and the question come from the line of Susy Tibaldi from UBS. Please ask your question.

[Susy Tibaldi, UBS]

Hi, good afternoon, thank you so much for taking my questions. My first one would be, if you can give us a bit of a flavor on the start of this year. Of course, you talked about the rebound in China, and -- but I was wondering if you can provide a bit of color also in other regions of the market, especially by nationality. We are hearing that there is starting to be a bit of volatility in some specific pockets of the market, for example, in the more aspirational consumer. So I was wondering, if you're seeing anything that is worth flagging there?

My second question is on your gross margin, which reached a new record, previously you were guiding around 78% and you already exceeded that. So is this -- let's say, do you have a new target? Is this going to be the new normal? And I imagine, like you also mentioned pricing has been a key driver and the brand has been repositioned a little bit higher. So are you happy with your brand positioning now? Or is pricing going to remain a key driver? It would be very helpful if you can break out in 2022 how much of the growth was volume and how much price mix?

And lastly, very briefly, given that you already pretty much reached your medium-term targets and there has been several management changes, would there be perhaps a new capital markets updates coming up? Thank you.

[Andrea Bonini, Chief Financial Officer]

Hi Susy. It's Andrea Bonini. So first on current trading. Current trading year-to-date has improved since Q4 and remained strong. We're seeing growth in all geographies. Compared to the second half 2022, growth in Europe is normalizing as expected, I would say. Asia Pacific and Japan have accelerated quite significantly in the case of Japan. Asia Pacific benefits from Mainland China returning in positive territory and Hong Kong and Macau with solid growth as it is for Southeast Asia.

In Korea instead, we've seen a deceleration on the back of double-digit growth in 2022, but that is also impacted by the refurbishment of our flagship store in Seoul. US remains positive in single-digit territory. But the North American cluster is still up double digit. And finally, Middle East trends, I'd say, in line with 2022.

[Andrea Guerra, CEO]

Let me add one thing Andrea, it's Andrea Guerra speaking. One of the good things of this beginning of the year is that, our growth is really spread out, spread out on our brand portfolio, so Miu Miu and Prada are both growing strong. And on the other side, which is one of the things I like the most is that, all our product categories are moving in the same direction. And on the other side, we have really one of those moments that we are also obviously nurturing as much as we can of very good traffic in our stores. Back to you, Andrea.

[Andrea Bonini, Chief Financial Officer]

Okay. So, on the second point on gross margin, there were several questions in this. Let's start with the 2022 dynamic. So 2022, I mean, first of all, let's start saying that we're really happy by the growth because it's high-quality growth in the sense that it's organic and it's growth driven by full price.

I mean, we have over the years strategically reduced presence in outlets and so, as I said, I mean, it's full price growth that is driving the results. This full price growth benefit from both an increase in average price and also full price volumes. And actually the contribution is fairly balanced.

With reference to gross margin, going forward, we are obviously satisfied with the level we have reached. I mean, this is frankly also investments made in the previous years in infrastructure capacity, in manufacturing that are paying off and from here, from this level, we would expect -- we wouldn't expect expansion or any meaningful expansion.

And the other question that was asked in terms of expectation for pricing going forward. What I'd say is, for 2023, we do expect a benefit. Again, we do expect an improvement in terms of average price, but improvement in average price has different components. So, point number one is, increases of 2022 going run rate. The second element is the product mix and then to a low -- lower extent, price increases. But as I said, I mean there is a third and -- there is a third component. New targets, which was the final questions, in due course, I would say.

Next question, please.

[Operator]

We are now going to proceed with our next question. And the questions come from the line of Thomas Chauvet from Citi. Please ask your question.

[Thomas Chauvet, Citi]

Good afternoon and thank you. My first question would be on, you talked about sales productivity and OpEx more generally, if we look at your gross margin, 79% last year, even higher in H2, so slightly above your medium-term target. The EBIT margin at 20%, also in line with your target but that implies obviously, your OpEx to sales ratio in the high 50s percent is obviously quite high in the industry. How do you see OpEx leverage in the future, but also in 2023, you mentioned that OpEx would moderate this year. If I understand correctly.

My second question would be just a clarification, you said sales have improved at the start of the year versus Q4, did I get correctly that Q4 was plus 14%, so does that mean that the overall Group or is that just retail is growing faster than plus 14% in January, February.

And finally on the collaboration between Mrs. Prada and Raf Simons. This -- we saw that the third autumn winter collection presented a few weeks ago. How would you characterize the evolution of the collection, now that they've been working together for three years in terms of style, in terms of consumer adoption, and ultimately commercial impact. I mean, we see the numbers obviously, but any more qualitative color you could give would be very helpful. Thank you.

[Andrea Bonini, Chief Financial Officer]

Okay. Thank you, Thomas. So on margin outlook in OpEx, I'd say on OpEx, I mean two things. I mean first of all, in 2023 we will remain focused on organic growth and sales productivity. There's also -- yes, as I said, I mean there is also an element of in 2022 normalization of fixed OpEx and that's why, so with more retail events and business going back to normal level from COVID and that's why we would expect also the fixed topic component in terms of growth to moderate in 2023. So these are positive elements.

On the other side, I mean, what I want to stress is the fact that I mean, we see the industry being increasingly polarized. And we want to be in the group at the top, and so that means that we will need to continue to invest behind our brands and that's why we plan to keep in 2023 marketing communication investments substantially flat aligned with 2022 in terms of percentage of sales, which means that we will grow in absolute value.

So bottom line, we won't be focus on the short-terms and we won't be obsessed when it comes to profitability, short term, but with growth in line or above our target, we expect further operating leverage and EBIT margin expansion in 2023.

On the Group growth, my comment with reference to year to date trading was with reference to retail. So having seen an improvement vis-a-vis the 14% that we had in Q4 of 2022. And for the last question, Andrea, thank you.

[Andrea Guerra, CEO]

Yeah if you want [Multiple Speakers] I can answer. I mean the relationship between Mrs. Prada and Raf, I think, from day number one has been a very easy and natural interaction. And this is visible more and more we go through shows, obviously, what you have to always bear in mind is that, whatever happened to the Group, the Group has always been -- has always remained focused on what Prada means and what Miu Miu means. We are so lucky to have the founders alive and kicking and guiding the way from that point of view with the connection between style, between the product development, between the industrial side, between the innovation side that I think it's really unique in the industry.

[Thomas Chauvet, Citi]

Thank you.

[Andrea Guerra, CEO]

Next question please.

[Operator]

We are now going to proceed with our next question. And the questions come from the line of Edouard Aubin from Morgan Stanley. Please ask your question.

[Edouard Aubin, Morgan Stanley]

Yeah, good afternoon guys. Thank you for taking my questions. So the first one, Andrea, on China. I think, you said that the year has started positively, apologies for coming back on current trading, but just trying to understand the magnitude of the rebound. Am I right in thinking that the comparison basis was quite difficult in January and February last year, you were up maybe mid-teens up 20% and then things get much easier from mid-March. And if you please could quantify the magnitude of the rebound, and we don't obviously need exact figures, but just an order of magnitude year-to-date. So that would be helpful. That's question number one.

Number two, Andrea Guerra this time. I think you talked about sales density being a key focus for you. And indeed, you've an operating leverage story going forward with -- driven by higher sales density, could you please share with us some of the figures, in terms of -- am I right in thinking that your sale density last year was about EUR26,000, EUR27,000 per square meter per year, which is obviously below what you were doing at the peak and substantially below what some of your peers are printing today, and therefore, what could we expect within the next three, five years in terms of sales density.

And sorry, lastly, related to that on the sales density, could that -- obviously that's going to be mainly driven by sales growing, obviously, at the brand globally. But you -- could you also proceed to some rationalization of your store base which you seem to have been reluctant to do in recent years. So given that you have a relatively large footprint. Sorry.

And then, sorry, the third and last question is on your vertical integration, which you mentioned earlier during the prepared remarks, so can you please just give us an update on where you stand, more or less at the Group level and then breaking it down by product category, and what are roughly your medium-term target, an update on that that would be helpful. Thank you so much.

[Andrea Guerra, CEO]

So Andrea Guerra answering to your -- let's say the first three questions. In terms of China, we have seen a beginning of the year, which has been progressively positive, an excellent Chinese New Year. And I would say that we have been observing a re-beginning of internal of China travel, which has given to the cities a kind of new aura and a kind of new dynamism and this is highly visible in the stores as well. So we have seen a growth and as you were saying, comps will now become easier as we go through, let's say mid end March, April, May. So China is for sure one of those elements of positive stance for 2023.

In terms of store density, I don't think we have never given exact figures, but when you say that we have a highway or a journey to be done compared to the best, I could agree with you. I think there is a -- there is work to be done, there is work to be done on people, on training, on events in stores and out of stores, on the ability to be better between in-store and digital and back to store.

There are so many things we have to do and I think that theoretically, we know how to do them. So now, we need to go on the floor and do them. I think that that would be -- that will be one of the biggest drivers of our performance in the next period. In terms of rationalizing our store base, I would disagree with that. At the end, Prada full image stores is somewhere around 200. So we're not talking of a big scale than we have a number of other stores. With Miu Miu, we have gone through a rationalization, while we were some kind positioning better the brand. But I think that we have an opportunity really to make the base we have working better, most probably this year, we're not expanding our store base, but we really need to make it working better.

In terms of the last question, in terms of vertical integration, I think it's a journey of controlling supply chain, it's a journey in controlling engineering, being more flexible, being quicker, controlling quality and I think, this is a never ending journey. And I think, Prada stands as the best in the industry.

[Edouard Aubin, Morgan Stanley]

Okay, thank you. Thank you.

[Andrea Bonini, Chief Financial Officer]

Next question, please.

[Operator]

We are now going to take our next question. And the next question come from line of Melania Grippo from BNP Paribas Exane. Please ask your question.

[Melania Grippo, BNP Paribas Exane]

Hello, good afternoon everyone and welcome to Mr. Guerra and congratulation on your results. I had two questions, one is regarding the price increases for 2023. Can you please detail that? I'm not sure, you mentioned it, but if you can say more or less what you expect overall price increase in 2023?

And then my other question is on the metaverse NFT. How do you plan to develop your presence in the metaverse? So what is the realistic potential in this space? Do you ever imagine to have a percentage of your sales from this in the future? Thank you.

[Andrea Bonini, Chief Financial Officer]

Thank you, Melania. Andrea Bonini. On prices, a couple of comments. I mean, one, I mean, we'll keep monitoring market conditions and will respond appropriately. We want to be -- want to be -- we are, we want to be and remain competitive. As I said before, I mean, we anticipate a further improvement in average price. But as I said before, I mean there is three drivers to that, run rate of 2022 price increases, mix, and then to a lot extent, the new price increases. So that's it on prices, and I'll pass it to Lorenzo for the second question.

[Lorenzo Bertelli, Marketing Director and Head of CSR]

Andrea, now on the last question. The second question, of course, metaverse NFT, I mean is a new area for everybody, is for sure, an upcoming market, but we have some platform in place taking care of it, and like the [indiscernible] other projects, but you know, it's just the beginning of a journey. So at the moment is not absolutely at all one big element of the Group, but for sure is a key element to explore in the future and we are exploring, we're making our own way and we're approaching in the Prada way. And so let's see in the future, but for sure it’s an important element of conversation, as it has been in the past and the beginning of social network. So we'll keep an eye on it and we'll keep experimenting and give us our perspective. Thank you.

[Andrea Bonini, Chief Financial Officer]

Next question please.

[Operator]

We are now going to take our next question. And the questions come from the line of [indiscernible] from HSBC. Please ask your question.

[Unidentified Participant]

Yes. Hi, good afternoon, everyone. Actually I have three questions. So the first one is on China. So just, will it be possible to give the magnitude of the organic growth decline you have in Q4 2022?

The second question is about the US, have you observed a dichotomy, discrepancy in terms of performance between the lower price point segment and the higher price point segment with the higher price point being -- holding you better than -- actually more [Multiple Speakers]

[Andrea Bonini, Chief Financial Officer]

Sorry to interrupt. I'm really sorry to interrupt, but we're struggling to hear. Would you mind starting again with the questions.

[Unidentified Participant]

Yeah, sure.

[Andrea Bonini, Chief Financial Officer]

Apologies. Thank you

[Unidentified Participant]

Is it better now?

[Andrea Bonini, Chief Financial Officer]

Seem so. Yes, thank you.

[Unidentified Participant]

Okay. My first question was about China and the performance you had in Q4 2022, it would be helpful if you can quantify the organic sales growth decline in China in Q4.

The second question is about the discrepancy -- you observed a discrepancy in terms of performance in the US between the actual price segment -- entry price segment and higher price point. And the last question is about the performance in jewelry. Can you give us an indication about the performance of this division and if you are doing the marketing push, you are doing behind that division? Thank you very much.

[Andrea Guerra, CEO]

So I -- in order to be clear, for what regards your first question and second question. I think we have given extensively -- and extensive answers up to here, and I don't think, we're ready to give you some more details about the different performance. I have to say that in US, I wouldn't be so attentive today between low and high. The issue is, how strong is your brand? If your brands are strong, we can deliver good performance. Obviously, then we need to be strong in retail, we need to have the proper people, proper efficiency. But I wouldn't say that US has any kind of issue.

Jewelry launch, I would say that first of all, has been an unbelievable brand success. I think that again, this has reinforced our sustainable message -- our sustainability message. This thing about only and only creating our fine jewelry collection through Eternal Gold, recycled gold has given to the world a completely new way of looking at jewelry, a new way of looking at a new product category for Prada. So whatever the business will be -- we're already happy of how this has given further value to our brand Prada.

Having said so, we will really measure business in 2023 and for sure, I will be happy to report to you also during the most important seasons of jewelry. I could only joke with you and say that St Valentine has been a super record for fine jewelry. But it was the first year.

[Unidentified Participant]

Thank you.

[Andrea Bonini, Chief Financial Officer]

Next question, please.

[Operator]

We are now going to take our next question. And the questions come from the line of Paola Carboni from Equita SIM. Please ask your question.

[Paola Carboni, Equita SIM]

Yes, hello. Hi, good afternoon, everybody. I have a few questions, the first one is referring to your statements in the outlook section of the press release. You same store maintain some caution on the evolution of the context, which remains uncertain and so and so forth. So can you share with us what could worry you more, where do you see any potential risk coming from, if any?

Second question is, if you can comment and update us on your client base in terms of each cluster and also given the stronger sales results you have been achieving, whether you see the success being driven more by repeaters and your loyal customers or more by new customers and if so, where are you recruiting them from?

And then the third question, if you can comment on working capital and CapEx. For working capital, you managed to improve versus the previous years. I'm wondering whether this is sustainable achievement for the next year? In particular, I was surprised by your strong control of inventories, notwithstanding the sudden slowdown of China in the last few month of the year. And on CapEx, you mentioned the potential acceleration. So if you can comment on that. Thank you very much.

[Andrea Guerra, CEO]

So I think that, regarding your first question, I think to be cautious in 2023, or let me say in the past 23 years of this century. It's normal. I mean there is nothing strange in being cautious, behind every corner there is a risk or better every week something happens and being the world so connected, whatever happens in any part of the world is reflected somewhere else.

So the real thing is that we are not worried about anything else. We need to work on the -- on our agility, on the fact that we are able to constantly adapt. And this is again, I would remark, one of the best-in-class items of the Prada Group, which is the velocity, the flexibility and the reactiveness of the supply chain. I think this is really best-in-class.

So we're not worried, but I think, this is the proper way of -- the proper attitude in this -- during these years. Regarding the second I will ask Lorenzo…

[Lorenzo Bertelli, Marketing Director and Head of CSR]

Yeah. So, regarding your question on customer mix by age range, I mean, it's something that we never disclose so precisely. But what I can say that we are super active with the part -- the pace of growth, the GenZ compared to the others. Of course, is going to be key for the future also to drive our growth source, invest in the lifetime value of our customer and for sure the GenZ is the beginning of the journey for them. But still we have to work a lot with millennials.

So generally speaking, we are happy with the growth that we have with GenZ. But if I have to give up some priorities to increase the lifetime value of our customer. And then, of course, all our sustainability angle and so on, we are very appealing to the new generation

[Andrea Bonini, Chief Financial Officer]

And then finally on working capital and CapEx. On working capital and inventory, I mean the answer is yes, we will remain focused on that and in controlling the development of that. CapEx. Yes, I did mention a further acceleration in this year 2023. We believe that this year, we could be at around EUR300 million or slightly in excess of that in terms of CapEx, because indeed, I mean, we want to further accelerate retail which will remain largely focused on the existing store network, so store renovations, et cetera. And then, IT and industrial CapEx, with industrial CapEx focused on expanding capacity of our plants. Thank you.

[Paola Carboni, Equita SIM]

Thank you very much. Sorry, just a follow-up if I may. Can you also provide some comment on the evolution of the client base and what is driving your success between repeaters and new customers if possible? Thanks.

[Andrea Guerra, CEO]

As I answered it before, I mean if I -- to give us a priority is to increase the lifetime value of our customers source, so the fact of being repeating customers, so today, we don't have a problem of new customer traffic. We need to invest more in our customers. So I think that I answered your question.

[Paola Carboni, Equita SIM]

Okay, thank you. Thank you very much.

[Andrea Bonini, Chief Financial Officer]

Next question, please.

[Operator]

We are now going to take our next question. And the questions come from the line of Chris Gao from CLSA. Please ask your question.

[Chris Gao, CLSA]

Good afternoon, management. Congratulations on the great results. This is Chris Gao, [indiscernible] analyst from CLSA. Thank you very much for the chance. I have a very -- I have a few questions. So firstly, we would like to ask about OpEx ratio. So you just mentioned that all major OpEx ratios [indiscernible] opening. And can you give us a bit more color on the -- on your marketing budget plans going forward, especially on your marketing budget allocation preferably for a breakdown of China versus outside China?

So I'm wondering, if you are planning to increase your marketing and store investment in China? And if yes, in what magnitude would you raise your investments and what are the key initiatives we could expect in the coming year in terms of the marketing and store opening? And this is the first question.

My second question is related to the growth of -- the growth driver behind the Chinese glasses recovery. So if we want to break down about growth that's driven by existing customers and new customers. So how much of the recovery is driven by the existing customers and how much is driven by the newly recruited customers? So this is the second question.

And the third question is related to your timetable -- [indiscernible] timetable of Milan dual listing, and also in terms of the Hong Kong Stock Connect entrance, since currently, the Mainland Hong Kong Stock Connect system has been open to international companies. So what is our current progress in terms of the discussion to tackle with the possible [indiscernible] or technical issues that we're facing in terms of the Stock Connect entrance. Thank you very much.

[Andrea Bonini, Chief Financial Officer]

So I will answer to the marketing budget for sure in the -- during the budgeting period, we designed different scenario and our baseline was with an increased investment, of course, for sure in China, but still, we have on the plate different scenario to be played and triggered depending according to how is going to be the market in the following months. And so, we're prepared and we're ready to any possible scenario. And -- but for sure, I confirm that China is one [indiscernible], if not the key priority market in terms of increase of investment.

And I'll then hand over to Andrea for the rest of the question.

[Andrea Guerra, CEO]

Regarding existing and new consumers nowadays in China, I would say, it's one of those questions that you could give whatever answer. That is going through the past three years, where you had consumers that were blocked in houses that were buying online that are now probably back in store that are traveling again in China.

I would say that today and having the Prada brand gone through a very positive journey in the past three years in terms of brand equity, we have in right in this moment more new customers than repeat customers coming to our stores in this reopening of China.

[Andrea Bonini, Chief Financial Officer]

So lastly on Milan. And the Stock Connect inclusion on Milan. I don't have any news, I mean to share at this point, with what we said in the past. And on Stock Connect, yes, it's a possibility. As you rightly mentioned, I believe there is some technical issues to work through, but it's a possibility for the future.

Thank you. Next question please.

[Operator]

We are now going to proceed with our last question. And the questions come from the line of Liwei Hou from CICC. Please ask your question.

[Liwei Hou, CICC]

Good afternoon, everyone. This is Liwei Hou from CICC. Congratulations on the great results and thank you for taking my question. I've got two questions, the first one is on our expansion into jewelry, Eternal Gold. So if judging by the contribution to sales, it is still in the low single digit. So I was wondering, what would be our plan for the future target of the size of jewelry business and also our price positioning and the clientele positioning going forward? That's my first question.

And the second one is a follow-up on the expansion of our own plans. So we have ambitious goal for 2023 to achieve above market growth, so wondering, to support that growth, how do a -- increase our supply, is it mainly from the own production or a combination of self-production and selective suppliers? Thank you very much.

[Andrea Guerra, CEO]

So regarding jewelry, I will go back to what I was saying before, in 2022 basically the launch was in November. So obviously today, it's really marginal. What I want to tell you about jewelry is that going forward, for us, is more a tool to reach our consumers in a different attitude and new consumers.

So we are targeting high net worth, very high-net-worth but also our clients in a different attitude. It will never change dramatically our profit and loss, but I really think, it's really an addition of a new category to our world and to our world of clients. In terms of supply chain, we have been building new facilities and expanding existing facilities. So at the end, it will be a little bit more inside and a little bit less outside. But if you want a synthetical question, I would say 50/50.

[Liwei Hou, CICC]

Thank you very much.

[Andrea Bonini, Chief Financial Officer]

So this concludes the call. Thank you very much. And we'll speak to you in May. Thank you. Bye

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.