Safilo Group S.p.A. (SFL) Earnings Call Transcript & Summary

Good evening, and welcome to the Safilo Group's Q3 2022 Trading Update. This call may contain forward-looking statements related to future events and operating, economic and financial results for the Safilo Group. Such forecasts, due to their nature, imply a component of risk and uncertainty due to the fact that they depend on the occurrence of certain future events and developments. The actual results may therefore vary even significantly to those announced in relation to a multitude of factors. Today's participants are Angelo Trocchia, Chief Executive Officer; Gerd Graehsler, Chief Financial Officer; and Barbara Ferrante, Director of Investor Relations. I will now pass the call over to Mr. Angelo Trocchia, Chief Executive Officer. Mr. Trocchia, you may begin, sir.

Hi. So good evening. Good evening, everyone, and thank you for attending today's conference call on the Safilo Group's Third Quarter 2022 Trading Update. Following our comments at the beginning of August, we achieved a positive exit to the third quarter, driven by the strength of our new collection, the investments behind our brand and a continued effort to increase the breadth of the services we offer to our clients. And our strong growth were backed by a business environment which remain broadly supportive, driven by a strong and busy summer season. This has allowed us to bring home another quarter of top line growth and further expansion of our profits and margins, keeping us on track with our goals. Looking at the key performance indicator of our quarter 3. Total net sales grew by 14.9% at current exchange rates, thanks to the solid pace of growth posted by the organic business, up 5.6% at constant exchange rates and further boosted by an even bigger tailwind provided by the strong U.S. dollar. On the bottom line, in quarter 3, we posted another double-digit improvement of gross profit and of the adjusted EBITDA with also the margin increasing over the same period last year, respectively, reaching 53.8% and 8.7% of sales despite still adverse inflationary developments. Results were predominantly a continuation of the market trend and business driver we saw in the recent quarters, with sales momentum remaining very supportive in Europe and in the main markets of Latin America and the Middle East and the North American market holding up versus another tough comparison base as well as being constrained by some logistic delays in the shipment of the sport products. On the other hand, the period benefited from the first significant sales rebound in Asia. Quarter 3 was very much again a period of growth for sunglasses sales, which remained our best performing product category, up by 7.1% on an organic basis, backed by one of the hottest summer season in the years and boosted by the significant return of tourists, but also another quarter of solid performance of our prescription frames business, which increased by 4.6% on an organic basis. Quarter 3 continued to see the return of consumer to stores, giving us the opportunity to further push the development and the adoption of our B2B platforms, increasing the business for the European platform, You&Safilo, by approximately 40% in the quarter versus the same period of 2021. Our total online sales, consisting of our direct-to-consumer sales and the revenue we manage through Internet pure player, were up low single digits in quarter 3 and up mid-single digits in the first 9 months, making up for around 14% of our total net sales. In the third quarter, the strength of our brand portfolio was again confirmed by Carrera, Polaroid and Smith, which, together with our other proprietary brand, represent around 41% of our year-to-date sales. Carrera and Polaroid continued to post remarkable double-digit growth, while Smith recorded a more moderate growth than in the previous quarter due to the delayed phasing of some deliveries I've just mentioned before. As for our licensed brands portfolio, Tommy Hilfiger, Hugo Boss, David Beckham, Under Armour and Isabel Marant were the other consistent driver of our organic growth in this first quarter, whereas the new license, in particular, Carolina Herrera, provided excellent additional support to our further development in specific geographies and consumer segment and in offsetting the sales made last year with some of the discontinued brands. In the quarter, our new collections and marketing campaigns continued to be among our key enablers as we remain focused on product innovation and on campaigns of great impact and visibility. Let me share with you some of our most meaningful activities which shaped our business in the period. Carrera enjoyed incredible social media and fashion press coverage with a globally recognized Brazilian pop star, Anitta, wearing the Carrera iconic style in her new music video, Lobby, which achieved more than 8 million views on YouTube. Quarter 3 was also an intense period of product and marketing activities dedicated to the Carrera-Ducati partnership, a 360-degree collaboration from the racetrack to lifestyle, from sponsorship to product, supporting the amazing team that over the last 3 years has proven to always be at the top of the world's most popular motorbike championship, winning the MotoGP. Moving to Polaroid. The quarter of Polaroid saw the launch of its back-to-school campaign, a very significant product and marketing initiative, which confirms Polaroid as a strong brand ambassador of our approach of sustainability, bringing together the strong commitment on green product, making its optical collection 100% sustainable, thanks to the use of bio-based material and recycled metal and its colorful and joyful effort to promote and support eye care for children. The campaign is still on air on the polaroideyewear.com website. I think you can have a chance and enjoy it. If we move to Smith. In August, Smith launched a new eyewear campaign off the back of some great new eyewear released early in the year. Your life is what you focus on is a dedicated campaign focusing on both sun and RX eyeglasses, which represents an evolution of Smith's commitment to help people see their optical path with clarity. And it features some of the Smith's top athletes, showing their passion not only for sport, but also for life. The campaign has reached over 600,000 views on YouTube. In September, Blenders announced an exciting new partnership with Oracle Red Bull Racing, officially kicked off at the Pirelli Gran Premio d'Italia in Monza. Blenders has now become an official sponsor of the Oracle Red Bull Racing team, launching from next spring 2023 an exclusive collection of Oracle Red Bull Racing sunglasses globally. So another meaningful partnership, giving Blenders an additional opportunity to strengthen visibility and engage with new consumer. I stop here and hand over to Gerd for additional details on our economic and financial performance. Gerd?

Thank you, Angelo, and good evening to all of you. Starting from our top line, I would just like quickly to highlight that this positive sales momentum recorded in Q3 allowed us to confirm a very solid progress in the first 9 months of the year with sales reaching EUR 831.3 million, up 12.7% at current ForEx, plus 5.7% at constant ForEx and plus 9.9% at the organic level. Following the introduction by Angelo, let me quickly build on our top line performance by geography. In Europe, our business remained very positive in Q3 with net sales growing by 15.5% at current ForEx, driven by the group's solid performance in prescription frames and the continued rebound of sunglass sales favored by the strong summer season and the significant flows of local and international tourists. In Europe, we recorded another organic performance at a robust plus 8.1%, which was also broad-based by brand and by channel, in this case, with the only exception of GrandVision, which declined, although the drop is expected to become more visible starting from Q4. We had another excellent quarter for Polaroid and Carrera and also for some of our main licensed brands, while the new licenses we introduced this year in the portfolio provided the region with an additional growth of around 6 percentage points, which we consider a significant indication of the successful renewal of our brand portfolio. Italy, Spain and France remained our best-performing markets where sales activities were very dynamic, and we continue to grow nicely also in Germany as we kept building stronger partnerships with some of our key accounts in the market. Q3 also confirmed positive momentum in some Eastern European countries, namely Turkey and Poland, where we have more recently started to invest. Staying on our main geographies. In Q3, our sales in North America increased by 8.4% at current exchange rates, thanks to the further strengthening of the dollar against the euro, which occurred in the period, while at constant exchange rate, the organic business remained slightly negative by minus 1.2% versus, as said, another tough comparison base last year. As a reminder, Q3 2021 grew by around 20% compared to Q3 2019 at the organic level in the region. I would say that in Q3, the U.S. business environment was characterized by some consumer spending shifting to Europe as U.S. tourists took advantage of the stronger dollar during their holidays as well as the overall resilience of the higher-priced segments. In the period, in fact, on one hand, we continued to register positive momentum in the upper part of our brand portfolio while seeing a softer trading on the lower-priced segments. On the other hand, as anticipated by Angelo, Smith's growth in its sports shops was more moderate than in previous quarters, temporarily held back by some logistic delays in the shipments of its winter helmets. The brand should see a rebound of its growth momentum in Q4 in its core sports products segment. In Q3, Smith online business was positive, while Blenders were still softer than in 2021 but turned positive in the month of September on a less demanding comp base as it did also in the month of October. Moving to emerging markets. As already highlighted, business in the rest of the world remained very dynamic also in Q3, showing a double-digit growth of 36.9% at current exchange rates versus last year. During the period, Carrera, Polaroid and some of the group's key licenses were again the key brands contributing to the positive organic performance of the area, equal to plus 13.3%, with the stronger sales trends in the period having been recorded in the Middle Eastern market and by India. Organic sales were also very solid in Latin America, where the growth of the 2 key markets, Brazil and Mexico, were further boosted by the new business of Carolina Herrera, a strong brand, with which to pursue the additional development of these countries. And finally, the business of our -- performance of our business in Asia and Pacific improved quite markedly in the third quarter, for the first time in the year recording a significant recovery over 2021. The region was up 43.3% at current exchange rate and by 46.1% at the organic level, driven by all the key brands we are focusing on to ensure current sales and future growth of the area. In the period, our key licenses remained the main growth drivers in Southeast Asia, while Carrera and Smith posted a strong progress in Australia. Q3 was a period of recovery also in China, where September was a month of fewer COVID restrictions. But as we have been learning, this is an ever-changing topic, and policies are still very stringent there. Moving down the P&L. Our economic profile improved also in this third quarter, again, driven by the growth and increased profitability achieved in terms of gross profits. Key driver of another quarter of year-on-year expansion of the gross margin were again, on one hand, the positive evolution of the top line in terms of price/mix effect, while, on the other, some further structural cost of goods sold savings, taking the ones achieved since the beginning of the year to EUR 8 million and to a total of EUR 22 million, including last year's now very close to the substantial completion of the COGS saving program related to the 2020 to 2024 group business plan. As in recent quarters, our tailwinds effectively countered a number of headwinds. In this quarter, we were more meaningfully impacted by the surge of energy costs, while we continued to register a dilutive effect of currencies on margin given our current supply chain footprint. On the positive side, starting from Q3, transport rates, mainly sea freight, have been decreasing quite materially from the peaks earlier this year. That said, we closed Q3 with a gross profit up 18% versus last year and the gross margin at 53.8%, 140 basis points higher than Q3 2021, while the underlying improvement compared to last year's adjusted gross margin was of plus 60 basis points. Finally, in the first 9 months of the year, our gross margin stood at 55.1%, respectively, 340 and 210 basis points higher than last year on a reported and adjusted basis. Below the gross profit, also in Q3, selling, general and administrative costs increased as a result of higher marketing investments in our brands to support the business growth over the summer and due to the impact related to software-as-a-service investment projects under the new IFRIC agenda, the equivalent of which in Q3 2021 have been capitalized. Such costs, which reflect our ongoing investments in digital transformation, equaled EUR 1.8 million in Q3 and a total of EUR 5.5 million in the 9 months to September. At the adjusted level, Q3 EBITDA reached EUR 22.6 million, up 18.6%, while the EBITDA margin rose by 30 basis points from 8.4% to 8.7% of sales or 9.4% excluding the IFRIC SaaS impact. This took our first 9 months adjusted EBITDA to EUR 85.3 million and the margin to 10.3% of sales, 10.9% excluding IFRIC SaaS, 100 basis points higher than last year or 160 ex IFRIC. As regards to group's net debt at the end of September, this stood at EUR 115.4 million or EUR 67.3 million pre-IFRS 16, corresponding to a comfortable adjusted financial leverage of 0.7x. Let me then conclude my recap by mentioning the new financing agreement we have just signed at the closure of the third quarter for a total amount of EUR 300 million maturing in September 2027 and consisting of a term loan facility of EUR 150 million, a revolving credit facility of EUR 75 million and a CapEx facility of an additional EUR 75 million. Given the difficult macroeconomic context and outlook, we wanted to secure our debt structure for the medium term early, extending maturity and making the group's capital structure safe. Today, the EUR 150 million term loan is drawn as we repaid the previous bank debt, and we have now some additional EUR 150 million on top to support the growth of Safilo going forward. I stop here and I hand over to Angelo for his final remarks.

Thanks, Gerd. I would just like to mention a few business developments which occurred between the end of the quarter and October. In September, we continued to invest in our digital transformation strategy, announcing the creation of Digital Force, an internal sales force academy that aims to seek and train new talent in the digital transformation and sales force technology field. We are doing this in partnership with DOT, Digital On Things, a consulting firm specialized in sales force ecosystems and recently incorporated in Lutech Group. The research and training of young talents in sales force technology will allow us to offer young people entering the job market the opportunity of positions in digital transformation functions in companies like Safilo. So our digital transformation strategy is today grounded on 2 key levers: our digital hub in the United States driven by Blenders and Smith's know-how and cross-fertilizing experience and our new business culture where data analytics and sales force are becoming our new way forward to unlock the value of data and elevate our decision-making. In September, we also further enriched and strengthened our partnership with Eastman by announcing the introduction of Eastman Tritan Renew in our polarized lenses, becoming the first player in the market to have a bilateral collaboration with Eastman on technical innovation. From August 2023, Tritan Renew polarized lenses will be featured in Under Armour eyewear, to be progressively rolled out across the rest of the portfolio of sunglasses, further asserting our commitment and efforts to bring more recycled materials to the eyewear industry. I would also like to mention 2 latest renewals. We renewed our licensing agreement with rag & bone, in line with our portfolio strategy of also offering locally relevant eyewear brands. While on the production front, we extended the manufacturing agreement with Kering Eyewear to 2026. Finally, to conclude, we took the decision to organize within the first quarter of the next year our next Capital Markets Day to share our updated medium-term targets and strategic development. We think this timing will allow us to have some better visibility on next year's trading environment in the different key regions as well as more immediate opportunity to follow up with our investor relationship -- relations activities. This concludes our presentation, and we are now ready to take your questions.

[Operator Instructions] The first question is from Oliver Chen of Cowen.

Angelo and Gerd, nice results. On the remarks, you mentioned that prescription frames had some solid momentum there. Would love some thoughts on what's driving that. And on the Smith side, it sounds like you're making progress on the logistics. Just what's ahead with that business in terms of the logistical issues and what we should pay attention to? And then Europe, inflation has been an important topic that's facing everybody. What have you seen with regards to your customer and the momentum and the health of the consumer in Europe?

Yes. Okay. So I take -- the prescription, I mean, obviously, this year, it's -- we come out from mainly in Europe after 2 years where the sunglasses -- I mean, last year, the sunglasses season hasn't started at all. So obviously, we see -- obviously, this year, especially with the great summer, the sun has been playing a crucial role. But the fact that the prescription keeps growing is a characteristic of this industry. The prescription is there. And let me say from one side, from a business perspective, prescription will keep growing because there is a need of myopia and presbyopia, which is becoming bigger and bigger. So I think obviously, stronger rebound of the sun is more related to a sort of comparison of the year before, where the growth of the prescription is sustainable and is a sustainable growth. So it will keep growing. The -- it will keep growing because there is a clear need, and this need keeps becoming bigger and bigger related to the problem of myopia on -- and presbyopia. But this is also why we took the decision years ago, if you remember, to rebalance our portfolio more toward prescription because sun is nice, sunglasses are nice, but these are really related to the season, the weather and the things which are more variable. Where prescription is there, there is a need, and the prescription will keep growing. On Smith, no, I think it's been a contingency program related to before we had problem in China, so shipping the product to North America. Now we had a couple of months tough in really managing the logistics in North America, which has not been easy. But there is nothing structural. So there is nothing that is something to be structurally concerned. I think that in the rest of the -- in quarter 4, the situation will be stabilized. So it's not something structural to be particularly concerned moving forward. About Europe, obviously, quarter 3, we have commented, October, it's quite a small month honestly for eyewear. So to have a more precise answer to your question, we need to wait a little bit more in November. So November will be the moment which somehow we will have some more signs from how the market or, let me say even better, how the consumer is reacting to all this inflation, which is inflation which is there. Till the quarter 3, to be honest, we have not seen any signs. As I said, October is not really relevant. So these weeks now in November will tell us a little bit more about the behavior of the European team. Now the growth in Europe, you saw, has been honestly quite relevant. Obviously, it's something that your question is spot on, is something we are really looking tight. But we need to have at least a couple of weeks on November to really understand how the consumer mainly in Europe is going to behave. It's a little bit too early. October, it's not really significant in eyewear. It's too small.

That was very helpful. One last question. So the U.S., you continue to have really nice momentum in the upper part of your portfolio. But you mentioned softer in entry and mid-tier. What dynamics are happening there? Is it anniversary-ing stimulus? And what are you seeing? We're seeing -- we are definitely seeing strength at the high-end consumer but a mixed consumer picture in the U.S. with low unemployment as well.

In U.S., somehow from a consumer, the consumer is getting more polarized in the sense that the luxury is going well. In our part of the portfolio, what we call the premium contemporary, so the upper part of our portfolio is performing well. It's a little bit more the low end of the market which is suffering. I have to say that in this moment in North America, the dynamic is more like we see more customers which are more conscious more than consumers. So I think that the dynamic is a little bit more on the customer side than more on the consumer. But obviously, the premium contemporary bit of our portfolio is the part of our portfolio which, in North America, is performing better compared to the low end. But I think this is the good thing of the current Safilo portfolio because really, we cover quite a broad spectrum of needs. So we are able to catch, let me say, better than what was our condition in the past, this change of the consumer. But by sure, in this moment, I think it's more the customer which is a little bit more conservative in buying in North America, whereas the consumer is -- keep buying. And obviously, the premium contemporary is the part of our portfolio which is currently performing better versus the lower part of the portfolio.

Yes. I think I would add maybe in the U.S., you also have this dynamic of the vision insurance providers. And of course, this is not necessarily a phenomenon of the lower-income consumer, but there is quite a broad majority of Americans that have vision care insurance. And our portfolio, which is sort of in the -- as Angelo was saying, contemporary/premium segment, plays quite well also in this area of the insurance reimbursement threshold. So that is always something that helps sustain prescription frames in North America.

The next question is from Oriana Cardani of Intesa Sanpaolo.

The first one concerns the production supply contract with Kering Eyewear. Can you quantify contribution to sales in the first 9 months of this year? And can you provide information on the terms of the new contract and of any revision to previous terms? The second question is on price. Are you still satisfied with the current price? Or are you thinking to apply a price increase for next year? Regarding -- finally, regarding the evolution of net debt, what is your expectation for the end of this year?

Gerd, I leave the 3 questions to you.

Okay. With pleasure. So I think on Kering Eyewear, let's see, we are doing this with them since 2017. It's been working quite well. The Kering Eyewear business, it represents, roughly speaking, 4% of our sales in the 9 months on a full year basis. And this is pretty much what we also see going forward with the new contract. So we are able to extend a fruitful partnership for the next 3 years until end of 2026. On the pricing or the price/mix, I mean, price/mix has been certainly a positive driver for our gross margin, both in the Q3 as well as in the 9 months. Obviously, the mix is healthier because there is not as much closeout volume that we had last year as we were still exiting some of our exit brand portfolio. With the pricing, let me say that on those brands and countries where we have been taking pricing actions and we always do this in a selective way, that we target really the brand-country combinations where we have the biggest potential and where we have done so, we see not only, let me say, a price mix improvement. We also see the volume growing. And I think that's always an important indication that despite this kind of intervention, we are still able to convince more consumers to buy our eyewear. I think this has clearly helped us offset some of those inflationary trends we were talking about. I mean, Q3 was quite impacted by energy prices, even though the consumption was a bit lower seasonally speaking. But energy prices, I think, are going to stay quite elevated. The good news is that inbound transportation rates, especially on the sea freight, are coming down. So this is helping us recover a bit the inflationary impacts of the past. So I think for now, we are okay where we are, but we will keep watching this very carefully as we go forward. On net financial position, so I think here, I mean, in the third quarter, we had a small cash flow absorption. Let me say that the operational flows year-to-date in Q3 have been very strong. We do have some buildup in the working capital, even if the dynamic, I think, is also starting to turn and to improve as we are collecting some of those receivables that we have built up at -- in the first half of the year. I have to say that it is probably unlikely that in the Q4, we will be able to turn a positive free cash flow. I think the delays of Smith that we were talking about, they are having some impact because clearly, it means that whatever we are recovering in Q4 is not going to be collected until Q1, while obviously, the inventory is already in transit and the payables are due. So this is going to have some timing effect. But we do believe that we are now entering a future where we can turn also our EBITDA performance into free cash flow from next year.

The next question is from Cédric Rossi of Bryan Garnier.

My first question is a follow-up on Oliver's questions regarding the logistic delays for Smith in the U.S. Could you maybe quantify the impact in Q3 in order to -- maybe to calculate the potential catch-up effect in Q4 in the U.S.? Or in other words, what would have been the growth in the U.S. excluding this negative impact? My second question is regarding the sort of the business with GrandVision. So I heard that the business was declining. So of course, it's the result from the integration process between GrandVision and EssilorLuxottica. What kind of impact you are expecting for 2023? And given with this declining business, could you be able to achieve a mid-single-digit growth next year, for instance? And my third question is regarding the -- so in term of branded portfolio and the licensing portfolio. So actually, in the U.S., the premium and contemporary segments are more resilient. Would you be maybe enticed to maybe focus more in potential new licenses? Could you be also encouraged to add more premium to high-end brands in order to have a more resilient portfolio in the future, given the tough macro environment?

Okay. Gerd, I start from the last, and then you cover the first 2. I mean, in terms of portfolio, I think as I was mentioning before, I think the good thing of our portfolio is that it's balanced. What I mean by that? We have Privé Revaux. We have Blenders. We have Polaroid. And then you start going up. We have Tommy, then you have Carrera, and then you have Boss, and then you have Carolina. So I think our portfolio, thanks -- we have David Beckham, thanks to also some license that we have had, is really balanced. And on top of balance, in the premium bit, I think we have Carrera. We have Carolina Herrera. We have Boss. We have David Beckham. So I think the reason why we are growing that bit, that our portfolio is already, I think, well balanced there. And also, now with Carolina Herrera, we are not only balanced in terms of position premium/contemporary, but we are also better off in terms of women and men. The reason why -- one of the reason why we've been adding that part of the portfolio is because we were not well represented on the women. In Western Europe, we have Isabel Marant, which is really a sort of French taste luxury brand. So I think that our portfolio is already well positioned to catch that what is happening on the market. Also, if you look to our Carolina Herrera collection, one of the reasons why it's doing so well is compared to the old collection, it's a richer collection. So it really catch sort of higher consumer. But building on your point, yes, we are absolutely looking tight, both brands and license, which can even further reinforce that part of the portfolio. So absolutely, yes, but I really think that already today, the reason why we are growing is because I think our portfolio is already catching that kind of opportunity. But we are open and actually we'll be open in looking to brands and license which can reinforce our position in that part for that kind of a consumer. Gerd?

Yes. On the question of Smith in terms of logistics delays, this is worth about 3 to 4 points of the growth of North America, okay? So if you look at our North American numbers, they would have been 3, 4 points better had we not had those logistic delays. So the region would have been in a growth situation also in the quarter. Obviously, here, we are talking about mostly helmets. Helmets are very bulky items. So they are much more cumbersome to transport than the little boxes of eyewear. The order portfolio is very strong. I mean, the winter season is looking to be a very good season in general for the industry. So the key for us is that we get as much of the delays recovered before the American Thanksgiving, which is at the end of November. And that is what we are working towards. On GrandVision, let's say that, I mean, we are -- we had a, let me say, decent first half of the year. With GV, of course, there is also an integration process in place on the other side that is taking time. So from Q3 and I would expect also in Q4, we will see there quite a deceleration of that business. How much it will be next year? I think it's too early to tell. I mean, the negotiations are obviously also and discussions are underway for that. It is also the season of the year where discussions with customers are for the future. And our priority has always been since this is not something that just happened yesterday is that we work with other chains in those markets where we have listings in the GV banners to strengthen our business with them, which it may not all happen exactly at the same time, but I think that is our focus to work in the medium term to recover this. I mean, the consumer of our brands is still there, and we are working to make sure our brands are present and listed in other customers' banners.

[Operator Instructions] The next question is from Domenico Ghilotti of Equita.

I have a couple of questions. The first, I'm looking at the cost side. So you were mentioning marketing efforts, and you were mentioning several initiatives that, for sure, will support your top line growth, but at the moment are also additional marketing costs. So can you give us a sense of what has been the increase in Q3 or 9 months? And what can be, say, the trend that we will see going forward? And then still on the cost side, I'm looking more at the gross margin level. You were mentioning the dilutive impact of U.S. dollar, and I assume that energy costs are also affecting your production, also your gross margin. So should we see -- well, dollar we know that is continuing, so the dilution. On the energy costs, should we expect also some -- a harsher impact in the rest of the year and beginning next year? I don't know how much hedging you had and how it's progressing.

Okay. I take the answer -- I take your question on media -- on the marketing. And then Gerd, you answer to that. I mean, just to take into account, Domenico, 60% of our investments are on our own brand. Roughly the 9 months, our total A&P is around 10%, and it's a little bit higher on our own brands. So I think as I said last time, I think we keep investing because without investing behind our brands, there is no future. I think we are investing behind obviously -- where there is the highest increase obviously is behind Smith is the brand which is growing faster and also for this period of the year is where it's better to invest. So I think we are investing. We will keep investing. I think the level of investment is the right one. Where we are really looking and working a lot is keep focusing on investing, but really working on what -- on which media and which channel are we investing. So that is today the area of effort. But we are investing and we will keep investing on our own brand. I mean, this is also one of the reasons behind the growth of our brand.

You are quite satisfied with 10%. So you are quite satisfied with, broadly speaking, the 10% where you are today.

Yes. Absolutely. Yes, I don't think it's an issue. I think 10% is right. The work is that to get investment -- all the investments we are doing more and more efficient. That is the area really that's where we are putting a lot of efforts. But the 10%, that is the sort of order of magnitude which is fine to assure the right level of growth behind the brand.

Okay. On the second question, so there's different phenomena, let me say, playing in the gross margin. One of them is the energy cost, and you mentioned that. The rates of the energy have been very high in Q3, I mean not just for us but I think for anybody. But thankfully, our production volumes are lower in Q3. There's the August break and so forth. So the factories, they seasonally slow down typically. In Q4, I see already better energy rates, but we will have some more production. So I think the pressure of the energy costs is going to stay. On the other side, there is a degree of material raw material inflation, which is not so much a problem for our own production. But obviously, it is a topic for our suppliers. So as we are working through with our suppliers, we are playing a bit our sourcing savings versus the material price inflation. And then last but not least, we have price/mix. Mix has been favorable, as I was saying, before pricing. I think we took the right movements at the right point in time. So we went a bit earlier than perhaps was obvious at the time, but I think it is really -- it was the right move. So I mean, I do think that Q4 shouldn't be too different from Q3 in terms of gross margin. And then next year, we will want to see a bit how the macro situation will continue to evolve. Obviously, medium term, our goal is to continue building gross margin, expanding gross margin. That's where I think we still have the best opportunity to increase also our EBITDA margin.

On the salary, probably the only cost item, do you...

Yes. So far, let me say, it depends a little bit by geography. I mean, there are some geographies that are a little bit more, let's say, trigger happy when it comes to salary increases or demands. And I think those, we are trying to manage. I mean, this is typically more the, let me say, the Anglo-Saxon world. While in the rest of Europe, I think we still see it quite muted. And then I think we all need to see next year what may happen. I mean, again, our strategy is to use savings and whatever we can on price/mix to counter any inflationary impacts.

[Operator Instructions] Ms. Ferrante and gentlemen, there are no more questions registered at this time.

Okay. So thanks very much to all the participants and thanks for the question. Have a nice evening.

Thank you very much.

Bye.

Bye-bye.

Thanks. Bye. Bye-bye.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephone.