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. 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 investment behind our brand, and a continued effort to increase the breadth of the services we offer to our clients. Our strongholds were backed by a business environment which remained broadly supported, 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 three, total net sales grew by 14.9% at current exchange rate, 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 three, 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 three was very much again a period of growth for sunglasses sales, which remain our best performing product category, up by 7.1% on an organic basis, backed by one of the hottest summers in years and blessed by the significant return of tourists.
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 consumers to stores, giving us the opportunity to further push the development and the adoption of our B2B platforms, increasing the business through the European platform, Essilor, 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 players, were up low single digits in Quarter 3 and up mid-single digits in the first nine months, making up 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 brands 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 third quarter. Whereas the new license, in particular Carolina Herrera, provided excellent additional support to our further development in specific geographies and consumer segments, and in offsetting the sales made last year with some of the discontinued brands. In the quarter, our new collections and marketing campaigns to continue 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 the 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 three 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 three years has proven to always be at the top of the world's most popular motorbike championship, winning the MotoGP. Moving to Polaroid.
Polaroid, so the launch of its back-to-school campaign, a very significant product and market initiative, which confirms Polaroid as a strong brand ambassador of our approach to 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. It features some of 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 kicking it off at the Pirelli Gran Premio d'Italia in Monza. Blenders has thus 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. 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 nine 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 sunglasses 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 +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 continued 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 -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 U.S. dollar during their holidays, as well as the overall resilience of the higher price 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 price 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 product segment. In Q3, Smith's online business was positive, while Blenders was still softer than in 2021, but turning 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 +13.3%, with the strongest 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 two 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. Finally, the 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 +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 nine 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 nine 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 the 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 0.7 times.
Let me 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 we have, 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, 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 Salesforce academy that aims to seek and train new talent in the digital transformation and Salesforce technology field. We are doing this in partnership with DOT - Digital on Things , a consulting firm specialized in Salesforce ecosystem and recently incorporated in Lutech Group. The research and training of young talents in Salesforce technology will allow us to offer young people entering the job market the opportunity of positioning digital transformation function in companies like Safilo. Our digital transformation strategy is today grounded on two key levers.
Our digital hub in the United States, driven by Blenders and Smith know-how and cross-fertilizing experience, and our new business culture, where data analytics and Salesforce 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 effort to bring more recycled materials to the eyewear industry. I would also like to mention two 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 relations activities. This concludes our presentation, and we are now ready to take your questions.
Excuse me, this is the conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove your question, please press star and two. Please pick up the receiver when asking questions. We will pause momentarily while participants join the queue. The first question is from Oliver Chen of Cowen.
Hi, Angelo and Gerd. Nice results.
Hi.
On the remarks, you mentioned that prescription frames and some solid momentum there. Would love some thoughts on what's driving that. 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? Then Europe. Europe inflation's 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? Thank you.
Yeah. Okay. I take it, the prescription, I mean, obviously, this year, it's we come out from mainly in Europe after two years where the sunglasses I mean, last year, the sunglasses season hasn't started at all. Obviously, we see, obviously this year, especially with the great summer, the sun has been playing a crucial role. The fact that the prescription keeps growing is a characteristic of this industry. The prescription is there. 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.
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 a sustainable growth. It will keep growing. The Rx will keep growing because there is a clear need, and this need keeps becoming bigger and bigger related to the problem of myopia and presbyopia. 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 things which are more variable. Where prescription is there is a need, and the prescription will keep growing. On Smith.
No, I think it's been a contingency, a contingent problem 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. There is nothing that is something to be structurally concerned. I think that in the rest of quarter four, the situation will be stabilized. It's not something structured to be particularly concerned moving forward. About Europe. Obviously, you know, quarter three, we have commented. October it's quite a small month honestly for eyewear.
To have a more precise answer to your question, we need to wait a little bit more November. 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 there. Till quarter three, to be honest, we have not seen any sign. As I said, October is not really relevant. These weeks now in November will tell us a little bit more about the behavior of the European consumer. Till now, the growth in Europe, you saw, has been honestly quite relevant. Only it's something that your question is spot on.
It's something we are really looking at it, but we need to have at least a couple of weeks in November to really understand, you know, how the consumer, mainly in Europe, is going to behave. It's a little bit too early. October is not really significant in eyewear. It's too small.
Thanks, Angelo. That was very helpful. One last question. The U.S., you continue to have really nice momentum in the upper part of your portfolio. You mentioned softer in entry and mid-tier. What dynamics are happening there? Is it anniversarying stimulus and what are you 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 customer which are more conscious than consumers. I think that the dynamic is a little bit more on the customer side than on the consumer. 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.
I think this is the good thing of the current Safilo portfolio, because really we cover quite a broad spectrum of needs. You know, we are able to catch, let me say, better than what was our condition in the past, this change of the consumer. For sure, in this moment, I think it's more the customer, which is a little bit more conservative in buying in North America, where the consumer, it keeps buying. Obviously the premium contemporary is the part of our portfolio which is currently performing better versus the lower part of it.
Yeah. I think I would add maybe in the U.S., you also have this dynamic of the vision insurance providers. 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. 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. That is always something that helps sustain prescription frames in North America.
Thank you. Best regards.
The next question is from Oriana Cardani of Intesa Sanpaolo.
Yes, good evening, and thank you for taking my questions. The first one concerns the production supply contract with Kering Eyewear. Can you quantify contribution to sales in the first nine months of this year? 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? Finally, regarding the evolution of net debt, what is your expectation for the end of this year? Thank you.
Gerd, I leave the three questions to you.
Okay. With pleasure. I think on Kering Eyewear, 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 nine months on a full year basis. This is pretty much what we also see going forward with the new contract. We are able to extend a fruitful partnership for the next three years until end of 2026. On the pricing or the price mix, I mean, price mix has been certainly a positive driver for our growth margin, both in the Q3 as well as in the nine 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. Where we have done so, we see not only, let me say, a price mix improvement, we also see the volume growing. I think that's always an important indication that despite, you know, 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 gonna stay quite elevated. The good news is that in 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 net operating cash flow absorption. Let me say that the operating cash 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 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.
This is gonna 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.
Thank you.
The next question is from Cédric Rossi of Bryan Garnier.
Yes. Good evening, everyone. 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 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 business with GrandVision. I heard that the business was declining, so of course it results from the integration process between GrandVision and EssilorLuxottica.
What kind of impact you are expecting for 2023, and even with this declining business, could you be able to achieve a mid-single-digit growth next year, for instance? My third question is regarding, so in terms of branded portfolio in the licensing portfolio. 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? Thank you.
Okay. Again, I start from the last and then you cover the first two. 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, you know, we have Privé Revaux, we have Blenders, we have Polaroid, and then you start going up. We have Tommy, and then you have Carrera, and then you have Boss, and then you have Carolina. So I think our portfolio, thanks to we have David Beckham, thanks to also some license that we have added, is really balanced.
Balanced in the premium bit, I think we have Carrera, we have Carolina Herrera, we have Boss, we have David Beckham. I think the reason why we are growing that bit, that our portfolio is already, I think, well-balanced there. 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. Now, 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-based luxury brand. 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 reason why it is going so well is compared to the old collection is a richer collection. So it really catch sort of higher consumer. But building on your point, yes, we are absolutely looking at high-end both brands and licenses, which can even further reinforce that part of the portfolio. So absolutely, yes, but I really think that already today, our. The reason why we are growing, because I think our portfolio is already catching that kind of opportunity. But we are open and actually, really open in looking to brands and licenses, which can reinforce our position in that part for that kind of a consumer. Gerd?
Yeah. On the question of Smith in terms of logistics delays, this is worth about 3-4 points of the growth of North America. Okay. If you look at our North American numbers, they would have been, you know, 3-4 points better had we not had those logistics delays. 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.
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 had, let me say, a 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. 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, negotiations are obviously also in discussions are on the way for that.
This is also the season of the year where discussions with customers are ahead for the future. 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 GrandVision banners to strengthen our business with them, which you know, 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.
Okay, very clear . Thank you.
As a reminder, if you wish to register for a question, please press star and one on your touchtone telephone. The next question is from Domenico Ghilotti of Equita.
Good afternoon. I have a couple of questions. The first, I'm looking at the cost side. 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. Can you give us a sense of what has been the increase in Q3 or nine months, and what can be, let's say, the trend that we will see going forward? 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, so your gross margin. Should we see? Well, dollar, we know that is continuing, so the dilution.
On the energy cost, should we expect also some sort of a harsher impact in the rest of the year and beginning next year? I don't know how much hedging you had and how is progressing.
I take your question on the media, on the marketing, and then give you answer to that. I mean, just to take into account, Domenico, 60% of our investments are our own brand. Roughly the nine months, our total A&P is around 10%, and we're still a bit higher on our own brands. I think, as I said last time, I think we keep investing because without investing behind our brand, there is no future. I think we are investing behind all the. Where there is the highest increase is behind Smith, the brand which is growing faster, and also for this period of the year is where it's better to invest. 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 investing, but really working on what, on which media, which channel are we investing. That is today the area of effort. We are investing and we will keep investing on our own brand. I mean, this is also one of the reason behind the growth of our-
10% of-
-of our brand.
You are quite satisfied with the 10%.
Sorry?
You are quite satisfied with, broadly speaking-
Yes.
-with the 10% where you are today?
Yeah, absolutely. Yes. I don't think it's an issue. I think 10% is right. The work is that to get more investment, all the investment we are doing more and more efficient. That is the area really that's where we are putting a lot of effort. The 10%, that is a sort of order of magnitude, which is fine to assure the right level of growth behind the brand.
Okay. On the second
Yes.
On the second question, there's different phenomena, let me say, playing in the gross margin. One of them is the energy cost, and you mentioned that. The energy rates have been very high in Q3. I mean, not just for us, but I think for anybody. Thankfully, our production volumes are lower in Q3. There is 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. I think the pressure of the energy costs is gonna stay.
On the other side, there is a degree of raw material inflation, which is not so much a problem for our own production, but obviously it is a topic for our suppliers. As we are working through with our suppliers, we are playing a bit our sourcing savings versus the material price inflation. Then last but not least, we have price mix. You know, mix has been favorable, as I was saying before. Pricing, I think we took the right movements at the right point in time. We went a bit earlier than perhaps was obvious at the time, but I think it really was the right move.
I mean, I do think that Q4 shouldn't be too different from Q3 in terms of gross margin. 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 you.
Yeah. 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. I think those we are trying to manage.
For further questions, please press star and one on your touchtone telephone. Ms. Ferrante, gentlemen, there are no more questions registered at this time.
Okay. 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 telephones.