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The New Guard: Fabrizio Freda Takes the Reins

Fabrizio Freda, recently appointed ceo of the Estée Lauder Cos., reveals his sweeping vision for transforming the prestige player into a global powerhouse.

For all of his European charm, Fabrizio Freda thrives on playing the outsider.

It’s a lesson he learned early in his career, as he moved from Procter & Gamble to Gucci SpA and back to P&G again.

“The experience outside [P&G] gave me a lot more authority in challenging the status quo,” says Freda, who on March 25 was named president and chief executive officer of the Estée Lauder Cos., effective July 1. “I stayed the challenger forever.”

That position has become his persona and expected role at the 63-year-old Lauder company, where Freda has been tasked with creating and selling his new world vision to both Wall Street and to long-standing company executives.

During a wide-ranging interview two weeks prior to his appointment, Freda outlined his ambitious strategy for the company, with the goal of transforming its diverse assets into a more sustainable business philosophy. He repeatedly makes the distinction between top-line gains and sustainable, profitable growth, and is clearly intent on achieving the latter.

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Freda’s plan includes:
• Instilling and implementing one global vision that fosters collaboration as reflected by a novel new compensation code.
• Driving out inefficiencies.
• Dealing with underperforming brands.
• Restoring the corporate focus on putting the consumer first.
• Consolidating global infrastructure to operate on a more efficient basis.
• Growing the mature core brands while nurturing the smaller players.
• Looking for new growth from underexploited categories.

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Named president and chief operating officer in March 2008, Freda has spent the last nine months drafting his restructuring plan. It’s a message Wall Street seems more than ready to hear. “He has to get Lauder to run itself the right way,” says Caris & Co. analyst Linda Bolton Weiser. “The problem is not the top line, it’s the costs. He has to get Lauder employees to live differently.”

But don’t call him a revolutionary: Freda has too much sensitivity and finesse for that, preferring the term evolution to define the changes he’s implementing.

Clearly, these are pivotal times for the company, which, like all luxury firms, must come to terms with the global economic crisis. Meanwhile, its primary distribution partners, department stores, continue to cede foot traffic to new retail formats, particularly specialty stores, Internet and TV, as consumers continue to cross shop channels on the hunt for value, innovation and affordable indulgences.

Freda has already passed one major test, earning a glowing report card from patriarch Leonard A. Lauder, who more than anyone has defined the modern era of the prestige beauty industry. “He has my endorsement and approval and the family loves him,” says the 76-year-old Lauder, who in July will move up to chairman emeritus when his 48-year-old son, William P. Lauder, assumes the new role of executive chairman, opening the way for Freda’s ascension. The elder Lauder will continue to teach his leadership classes within the company, travel to key markets, address industry groups and advise on acquisitions.

Lauder praises the 51-year-old Freda for bringing new focus to the company, citing admirably his dictum, “Don’t get lost in the weeds.” He describes his new ceo as possessing an unusual combination of “market savviness and marketing savvy.” Lauder says Freda is a leader who has the focus to take the constituent companies and market countries in multiple directions with a multidisciplined approach, adding that his partnership with William has filled him with “optimism and happiness.”

“We are going to see the golden era of the company,” Lauder says, with a surge in energy and profitability that “we can be proud of.” He expects major improvements to be made in operations, which he admits “were the caboose of the Lauder train.”

In early February, Freda began to outline the broad strokes of a four-year restructuring plan is expected to help achieve just that. The goal is to wring out $450 million to $550 million in costs. The first steps of that effort include trimming its workforce by 6 percent, or 2,000 employees, over the next 18 to 24 months.

As a result of the plan, the firm expects to achieve an operating margin of 12 to 13 percent. Longer term, Freda forecasts the company has the potential to achieve a 15 percent operating margin with a solid growth plan. He acknowledges because of the recession’s grip, Lauder is now operating in the 7 to 8 percent arena. The company’s goal — even in this recession period — is to grow 1 percent ahead of the global markets. “If it is a recession, the markets will be flat, so we expect to grow at least 1 percent,” Freda says. “If one day the markets go back to growing 5 percent a year, we expect to grow a minimum 6 percent a year.”

The unveiling of the plan to resize the company led a few old Lauder hands to grumble that these ideas were either obvious or already in the works. Freda, however, demonstrates a perceptive power capable of not only being able to grasp small details, but also to soar to near operatic heights.

For instance, to leverage Lauder’s scale, Freda plans to organize the company’s brands by channel and consumer segmentation. His leadership team, effective July 1, is slated to include John Demsey, who currently is the group president of the Estée Lauder, MAC Cosmetics, Tom Ford and Prescriptives brands, and will now add the Specialty Group of Bobbi Brown, La Mer and Jo Malone to his portfolio.

Reporting to Demsey and taking on a new role will be Jane Hertzmark Hudis, who currently leads Beauty-Bank, Origins and Ojon, and will become global brand president of the Estée Lauder brand; Maureen Case, who will continue as the global brand president of the Specialty Group and oversee the Bobbi Brown, La Mer and Jo Malone brands, and Caroline Geerlings, who will continue in her role as senior vice president/general manager, Prescriptives.

Lynne Greene, currently the global president of Clinique, will now become the global brand president of the Clinique, Origins and Ojon brands. Reporting to Greene will be Jane Lauder, the senior vice president/general manager, Origins.

Veronique Gabai-Pinsky, who currently oversees Aramis, and Designer Fragrances, will become the global brand president, Aramis, Designer Fragrances, Beauty-Bank and IdeaBank, Lauder’s entrepreneurial think tank. Dominique Conseil, who is currently president of Aveda, will become the global brand president of Aveda, and the salon and pharmacy channels. Peter Lichtenthal will continue in his role as president of Bumble and bumble and Darphin, reporting to Conseil.

When asked what mark he would like to leave on the company, Freda seizes upon what he sees as the difference between being an international company and a global one. “We are a very strong North American company with an international business, which means we have been historically bringing the best of North America to the rest of the globe,” he says.

His vision for the next 10 years is “to bring the best in North America to the rest of the world, but also to bring the best of Asia to the rest of the globe, including North America, the best of Europe, the best of Brazil” and so on.

To that end, Lauder’s international strategy aims to put a greater emphasis on creating economies of scale by region, and also on developing new marketing capabilities on a regional basis. The regional structure, slated to be effective in July, will include Thia Breen, who is currently global president of the Estée Lauder brand, as president, North America, which is a newly created position and region, and Cedric Prouvé, group president of International. Prouvé will continue to have the following direct reports: Fabrice Weber, president, Asia Pacific; Ivan Fernandez, president, Europe, Middle East and Africa; Olivier Bottrie, president, travel retailing worldwide; Per Neuman, general manager Estée Lauder U.K.; and the newly created region of Latin America led by Daniel Rachmanis, senior vice president, Latin America and business development. Breen and Prouvé will report directly to Freda.

“A truly global company is a company that can take the best ideas, the best creativity, the best profits and bring them to the rest of the globe, wherever those best ideas are,” says Freda. “That’s why we’re creating the regions. The real long-term goal is to become so global that the opportunity to grow will be enormous.”

Weiser of Caris & Co. in a recent research report wrote, “To adapt to the global recession, Lauder is ensuring there are affordable entry price points within each brand. Lauder is finding that consumers are trading down within its brand portfolio, for example to MAC Cosmetics from the higher-priced Bobbi Brown.” She also notes that due to the weakening of the British pound, London has become the shopping mecca of Europe, and Lauder’s U.K. business is holding up nicely. The company continues to gain share in Japan, and consumption is healthy in Russia, says Weiser.

Freda’s second ambition is to burnish Lauder’s credentials as a bastion of innovation that’s mined globally — not simply from North America. “If you want to have the next idea to sell the globe on whitening and pigmentation, you go to Asia,” he says. “If you want to have the best possible idea on colors and lipsticks, you go to Paris. If you want to have a good understanding on mascara, you defi itely continue working in the U.S.”

Freda’s propensity to see opportunities through an international filter has won him praise from Wall Street. When it comes to Freda’s strategy for international growth, analysts applaud his agenda of moving strong and deep into key markets, like China, rather than spreading its efforts thinly across the entire globe.

“To create a sustainable, profitable model in a market you need to achieve a critical mass in that market,” says Freda. “Our international strategy will be one of achieving critical mass and strong penetration in the key, most potential markets, rather than diluting ourselves a little bit everywhere.”

Lauder’s short list of key markets includes China, Russia and the Middle East. Also on the company’s radar are “incubator markets”—particularly India and Brazil — where Lauder is starting from a relatively low base, but sees solid long-term potential.

“In incubator markets we are going to invest gradually and in a way where demand will anticipate our distribution,” Freda says. “We incubate by riding demand ahead of distribution, that’s the way prestige brands are built. It’s also less risky from an investment standpoint because it takes time but takes more gradual investment and then over time yields great, great returns.

“On the contrary,” he continues, “on markets where we are already today competing and where we need to achieve our goal faster, like China, Russia and the Middle East, we are investing more aggressively and looking for more aggressive growth across the entire portfolio.”

Freda’s international perspective is well informed. The trilingual executive (he speaks Italian, French and English) has lived in towns throughout Italy — Naples, Rome and Florence — and in Germany, Switzerland and Belgium. During his time at Gucci in the late Eighties, Freda had international oversight of marketing and strategic planning. While at P&G, he worked in various divisions — namely cough and cold, laundry, health and beauty, and, most recently, snacks, as president of Global Snacks — roles that required market insight in myriad regions and countries. Freda is bent on helping Lauder executives see through that international lens.

But conceiving of a plan and implementing it can be two different things, particularly at a company populated by well-tenured, high-powered players. By most accounts, Freda’s powers of perception and charm have enabled him to fit seamlessly into the firm, striking a balance between winning over the tight-knit Lauder loyalists and instilling fresh ideas. He is frank about the changes he’s making.

“I don’t believe that this company had from within enough of the breakthrough ideas, the culture and the experience that was needed to get to the next level,” he says.

He adds the company needed an outsider to import “some skills, vision, strategic elements from other experiences. And that’s what I think I am doing.”

Freda repeatedly stresses that Lauder is loaded with creativity. “We have plenty of water coming down the mountains,” he says. “It’s where to direct this water. That’s the next big step.”

However, Freda takes every opportunity to point out that he has learned many important lessons from Lauder’s highly creative staff and in particular from the elder Lauder. Freda clearly understands the need for working within the existing culture to affect change.

“Personally, I feel more than compatible,” he says. “I really enjoy being here. On one side, honestly, I’m bringing many capabilities, skills and ways to run a business, which are new and require some change.”

Change has not come without effort. “There’s been an interesting dialogue and openness from their side… and this dialogue is a very healthy one,” Freda says, referring to Lauder’s management team. “This company needed that, as opposed to the opposite model of having somebody coming in and wanting to change everything. That would never work here. Or, somebody coming in and just doing the same we have done for the last 20 years. That also would not have worked. The only possible model is a model of dialogue, of listening, understanding and then building on the past success and moving forward with some new, innovative way of working.”

Immediately after Freda arrived at the company, he spent six months on a Hillary Clinton-style listening tour, zigzagging across Lauder’s far-flung empire of 140 countries.

“I strongly believe in the power of listening,” says Freda. “I really listen a lot, more than what people believe. When I am silent, I’m listening, I’m not distracted. Never.”

That isn’t just posturing. Freda’s hearing is so acute the one thing he can’t get used to about living in New York is the incessant street noise. “Manhattan is very exciting, but a bit too noisy and stressful,” he says. “The stress I can handle, but the noise….Everybody who has something urgent to do makes a lot of noise,” he quips.

Listening, he says, helps him connect the dots.

“I’m pretty creative, but I’m not a blue sky guy. I’m more able to connect things no one has connected before to create the unexpected,” he says. “The way my thinking and creativity goes is listening, connecting and creating.”

While effusively praising the creativity, innovation and entrepreneurial spirit found within Lauder’s 29 brands, Freda says he was struck by a lack of true integration among them, and across the company’s international business.

“I found a company with little ability to exploit scale, little ability to leverage the strengths across the opportunities and across the markets internationally,” says Freda.

“Every country is like a little kingdom — separate — with its own organization, its own rules, its own distribution center, even its own buying office,” he says. “The same bottle was purchased in different countries from different people. So there’s little coordination.”

He dubbed this setup as working in “silos,” noting the approach meant Lauder was unable to leverage its strengths. “The company has been growing very nicely for many, many years, so clearly it has a strong ability to grow,” he says, but at the same time it has been growing less profitably than it should, and with more duplication.

“The drivers of growth, like creativity, branding as an institution, are very strong. The drivers of efficiency — like productivity, like cost control, like scale — have been underexposed in a big way. So the opportunity is clearly to leverage the strengths.”

A driving force in Freda’s plan is to convince company employees to sign onto a common vision, a vision of Lauder as the prestige market beauty specialist.

“It’s making one company, one team, one dream altogether,” he says, versus each brand operating independently in a holding conglomerate. “It can be a real one-dream company.”

Freda’s vision: “I would like the next 10 years to be the years in which this company produces the best ever innovation in prestige beauty across the globe. Imagine a company, which is a global prestige beauty leader, a well-diversified, brand powerhouse pivoting on creative innovation. That’s the heart of the company…. That’s our vision. That’s what we want to be.”

Freda emphasizes that Lauder will continue to be a brand-centric organization, and its management structure will not radically change. What will change is some attitudes. “This is an evolution, not a revolution,” he says. “The revolution is not in the structure, the revolution is in how people work together.” He stresses that Lauder is a brand-driven company and it will continue to be led by its global brand presidents.

As part of the new vision, Freda created the Executive Leadership Team, consisting of the brand presidents and regional leaders listed above, as well as the heads of each corporate function. The team is charged with achieving annual goals, implementing the three-to-five-year strategic priorities and resolving critical global business issues.

“[We’re] giving ourselves the task of managing the execution of this new strategy altogether in a well-coordinated fashion and in a much more cooperative fashion than what has been done in the past. In other words, make every single senior leader look at the company as a whole.”

He continues, “You needed leaders from brands, from supply chains, from research and development, to look at the model altogether and redesign it together. Each one of them in isolation would simply not get the result.”

Referring to a hypothetical example of a brand grappling with a problem in Europe, he notes, “a brand in isolation cannot change a distribution center, a brand can only use a distribution center.”

Freda, who says he meets with the Executive Leadership Team on a regular basis, has connected this new way of thinking to Lauder’s compensation structure. “The people will continue to be rewarded for their own unit results,” he says, adding that their bonuses will also be calibrated on the performance of the company as a whole. The compensation structure is still in the early stages of development, but Freda acknowledges this “is a big change” from the way Lauder operated in the past.

Evolution is a concept that never seems far from Freda’s thinking. “Even in nature, it is not the strongest animals that survive, but the most adaptable,” he says.

When discussing Lauder as he found it, Freda is careful to stress some of the positive elements of the culture, particularly the values inculcated by the Lauder family, will be preserved, while other aspects will be strengthened or jettisoned.

He defines the family values as “respect for individuals, their passion for entrepreneurship, the great respect for creativity, the great sense of humanity, which is in everything we do, the excellent relationships with the trade and making personal relationships as one of the key steps of trust building.”

However, “there are elements we need to change,” he says, pinpointing the silo approach of each brand behaving as if it was on its own, and “the fact that growth is the only thing that counts and cost control and productivity are less important…creativity is everything. It doesn’t need discipline [for the product] to be brought to market.”

Freda may put a great deal of stock into the power of listening — particularly to the board and Lauder family members — but he is an equally strong believer in engaging in internal debate and selling his case. “For example, the idea of bringing the consumer more in the center of our way of working is an area where we had a lot of interesting dialogue,” he says. “I had to explain exactly what I meant and why it is going to add value. And then, over time, we got an agreement on the right balance.”

He agrees with the characterization made by other observers that he not only possesses a sixth sense for ferreting out business opportunity, but once locked onto an idea he will not give up.

“I’m really determined, really laser-focused when I know what I think is good, but I want to bring my team with me. That’s my style,” says Freda, meaning he may be determined but he’s not dogmatic.

His ability to navigate corporate politics has already helped him claim one victory in arguing that Lauder needs to reconnect with the consumer. In announcing Freda’s ceo appointment, Leonard Lauder said, “Fabrizio is a perfect fit with the Estée Lauder Cos.’ culture. His strategic vision and ability to keep the consumer at the center of our business model will be instrumental in continuing to take us forward.”

Freda’s talk about putting the consumer first — including his call for Lauder executives to visit homes abroad and peek inside medicine cabinets — are tacit reminders of his tenure at P&G.

“We’re creating a culture of being a bit closer to consumers in everything we do,” he says. “To give you an example, the last trip when I was in India and the typical Estée Lauder Cos. senior manager visit is that you go to the country, you meet the senior leaders of the trade, and you go to your [brand] counters and you discuss with your consultants. Then you go to the office and you discuss the business with your team there. All this will stay and it’s excellent and pretty standard. But when I visit the counter, I want to interview the consumer with the people who shop with me and with the consultants to learn about what they think of what we are doing. I want to see homes of people. I want to see how many products are in a home and I want to see the 13 products in India, how different they are from the 13 products of Japan or from the 14 products in the U.S.…I want this to be an example of the new culture that we need.”

Despite the respect Wall Street has for the operating philosophy of P&G, Freda says he is bothered by the unrelenting focus on his tenure there, declaring, “Now I am an Estée Lauder leader and I want to be seen for that.”

But financial analysts welcome the strategic focus Freda brings to Lauder. “The family’s stock interest speaks volumes,” says BMO Capital Markets analyst Connie Maneaty. “But Freda is coming to a company where brands were run independently and had little coordination. There’s lots of opportunity  to drive out costs….It helps a lot that he spent as much time at Procter as he did. Executives from well-run firms offer big opportunities to the firms they join.” She continues, “Not every company has to run like P&G, but coming from there he brings the kind of systems and methods of a well-run company.”

Already as part of his multiyear restructuring program, Freda has created a Project Management Team, a subcommittee of the Executive Leadership Team. The projects were designed to deliver savings over four years. For example, there is now a direct procurement organization in which all purchases globally will be made by professional buyers. “It sounds easy, but we didn’t have it,” Freda says. Other initiatives include reducing costs on finished goods, reorganizing manufacturing operations and procurement of materials. Also on the list are rationalizing the logistics systems and reducing the number of distribution centers, “which we will need over the long term to operate efficiently in every region,” Freda notes.

Freda’s disciplined approach is not simply a business tactic — it’s a lifestyle, according to the lean executive. Late one evening, nibbling on a snack of almonds, Freda says, “I really work on my energy — the way I eat, the way I do sport, the way I breathe, the way I drink is all designed to maximize energy. I have to say it works because I could not do what I do without it.”

An avid sportsman — he skis, plays tennis, runs when the gym is not an option, scuba dives and sails — Freda tries to make a habit of exercising in the morning before walking his children, who are 11 and 15 years old, to school and then to the office.

“I am a pretty disciplined sports man except in the last few months, which is actually my biggest frustration at the moment,” he admits. “Somehow I’m losing [the habits] that I’ve had for the last 20 years of my life because of the extra work of these days. I’ll come back [to it] soon.”

Freda has more pressing issues at hand, and seems determined to funnel his energy into implementing his strategic vision of becoming more efficient, agile and profitable. “The current economy has, in a way, facilitated the understanding for why to change,” says Freda. “When you are a very successful company and a successful team, justifying the reason for change is more difficult. To justify the reason for change to a successful group of people, you need really to envision the long term, which we have done. But the economy has created also some short-term needs….It definitely helped to sell the argument.”

Before the economy showed cracks, department stores were struggling with an identity crisis as shoppers migrated to specialty boutiques and online. Freda pledges his support of department stores, which account for more than 50 percent of Lauder’s sales, globally. “We must help and cooperate with department stores to start growing this channel again in a significant way.”

He’s already had a series of meetings with Terry Lundgren, president and ceo of Macy’s Inc., the biggest beauty retailer in America. “He understands the answers that worked for the industry in the past are not the answers for the future,” Lundgren says. “We need to find new solutions to make the industry the fresh and vibrant business it has always been.”

As Macy’s did, Freda is looking to “create something different,” Lundgren says, who seems impressed to see Freda take an interest in learning the intricacies of Macy’s District Team approach to maximize Lauder’s business. “He’s the leader of the band,” Lundgren notes. “He strikes me as a good strategic businessman. He talks a lot about the customer, certainly people like me, but also the end-use customer. The truth is we all have to focus less on the sell-in to the stores and more on sell-through.”

Lundgren’s meetings with Freda sounded sublimely simpatico. Asked if the two men differed on anything, Lundgren says, “Not yet.”

In addition to department stores, Freda is also focused on emerging retail channels. He repeatedly asserts Lauder is not interested in the mass market, but it is keen on the Internet, direct TV and specialty stores, including Sephora and Ulta. Referring to Sephora and Ulta, Freda says they “are successful models where they are attracting a certain segment of consumers, particularly younger people, and their model for this segment of consumers is working pretty well.”

He impresses that Lauder’s portfolio is deep enough to allow its brands to play in various channels and avoid conflict and consumer confusion, because “distribution is an element of equity building.”

Freda groups Lauder’s 29 brands into three tiers: $1 billion brands like Estée Lauder, Clinique and MAC Cosmetics; $500 million midsized brands and small brands around $100 million.

Lauder’s plump portfolio may have fat to trim. As part of Freda’s restructuring plan, some yet unnamed brands have been put on watch and given the ultimatum to either shape up or get sold off. “We are happy with the large majority of the brands we have,” he says. “So our first focus will be to grow and accelerate growth on our big brands, and then to bring our medium-sized brands to become big brands as soon as possible. Those two are top priorities.”

The third is dealing with the laggards. “We are really focused on fixing the underperforming brands. We have finished a review of the brands and have identified which are the brands where we want to invest and which are the brands that today are underperforming by our standards,” he says. “For the underperforming brands, we have put a specific plan [in place] for the next 18 to 24 months. In the case we are not successful in turning around the brands, we will make different decisions.” When asked, he declined to identify which brands are in the doghouse. However, sources in the market often name Prescriptives, Origins and Tommy Hilfiger as among those likely to go.

To remain on Freda’s good list, a brand has to demonstrate strong potential for profitable growth. It has to fit Lauder’s core capabilities, distribution priorities, be competitive and offer a different business model “that can allow us to sustain this [business] over time.

“We are going to create a portfolio of brands, but we are going to manage the portfolio of our brands, trying to put resources on our biggest opportunities first,” Freda says. He not only was talking about one brand versus another, but also particular geographic markets, where certain brands would thrive. “It’s as simple as that and our biggest opportunities are not necessarily the big brands over the small brands.”

As is his style, Freda is careful to draw distinctions. “Ideally I want everything to be healthy and profitable. The core idea is not more brands or fewer brands,” he says, when asked if he favors fewer brands, asserting his goal is to “create a portfolio that really can allow us to play with all the consumer segments we need to play with and to play with all the key channels we need to play with.”

He also was careful to distinguish between small and underperforming brands. “We can have brands that are smaller and very profitable,” he says, noting that big brands sold in a huge number of doors can yield few sales per door. “Obviously a $1 billion business is fantastic to have,” he says, “but smaller brands, if they have the right productivity per door, are very interesting businesses as well.”

For now, the focus is on building existing brands, rather than going on an acquisition spree. “Adding small brands will not be a sustainable profitable model long term,” he says. “The real sustainable model is to grow our brands, particularly our big brands.”

Considering his broad experience, Freda might appear to present an unusual opportunity to marry the pull marketing power and discipline of the mass market with the enticing push tactics and finesse of the prestige arena. “I don’t think we are going to choose between the two,” he replies when presented with the proposition. “What we will do is leverage the abilities of the Estée Lauder Cos. to be always in touch with the consumers,” he says, ticking off the company’s army of in-store beauty advisers and its ability to extract market information.

Freda’s ability to command attention extends beyond the office. He is clearly proud of the fact that wherever he has worked, he has also carved out time to teach. This is evident in the way he phrases his thoughts, frequently ending a long, complicated answer with a succinct summary.

His penchant for spending time with the staff (“loves to talk, loves to teach,” says one executive) is well-known around Lauder headquarters.

“My passion in life is developing,” Freda notes. “I’ve been teaching at university all my life…and I like to develop people. If you want to make me happy, when you work with me, you tell me it’s not only that we’ve achieved some good results together, but you have learned something out of it.”

This unusually humane vibe fits neatly into the Lauder family creed. Asked about occasional reports of friction with Freda, Leonard Lauder dismisses the question. “Being in a company like this is like being in a family,” he replies. “I am about to celebrate my 50th wedding anniversary with my wife and I hope to celebrate 50 years with Fabrizio.”