e.l.f. Beauty, Inc.

Greetings and welcome to the Elf Beauty, Inc. Second Quarter Fiscal 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Willa McMahonman, VP of Investor Relations and Corporate Communications. Thank you. You may begin.

Good afternoon, everyone. Thank you for joining us today to discuss ElfBeauty's second quarter fiscal 2020 earnings results. My name is Willa McMahonman, and I'm Vice President of Investor Relations and Corporate Communications at Elf. For the past year, I was part of Elf's outside IR firm, Ellipsis. In September, I joined Elf in-house. I've been heading up IR and communications at companies like Trimble and Cisco Jasper for 20 years, and I'm thrilled to be a part of the Elf team and mission. As a reminder, this call contains forward-looking statements that are based on management's assumptions, expectations, estimates, and projections. These statements, including those relating to the company's fiscal 2020 outlook, are subject to known and unknown risks and uncertainties, and therefore, actual results may differ materially. Important factors that may cause actual results to differ from those expressed or implied by such forward-looking statements are detailed in today's press release and the company's SEC filings. In addition, the company's presentation today includes information presented on a non-GAAP basis. We refer you to today's press release for a reconciliation of the differences between the non-GAAP presentation and the most directly comparable GAAP measures. With me for management today are Tarang Amin, Chairman and Chief Executive Officer, and Mandy Fields, Senior Vice President and Chief Financial Officer. With that, I'll turn the call over to Tarang.

Thank you, Willa. It's great to have you on the team. Good afternoon, everyone, and thank you for joining us today. We're pleased with our second quarter results with net sales of $68 million and adjusted EBITDA of $15 million. Excluding elf stores, net sales were up 11% versus a year ago. We're also taking market share. According to Nielsen, in the 12 weeks ended October 5th, 2019, our dollar share of the color cosmetics category was 4.7%, up 70 basis points versus a year ago. Given this momentum, we are again raising our fiscal year guidance, which Mandy will outline shortly. We entered fiscal year 2020 laser-focused on five strategic imperatives to drive top-line and market share improvements. Let me provide a brief update on each of these. Our first strategic imperative is to drive demand in our brand. We have a compelling mission to make the best of beauty accessible for every eye, lip, and face, and it's our job to make sure we're communicating our unique value propositions. We are pleased with the initial results behind our Elfing Amazing campaign, which delivered 175 different versions of playable ads to pique consumer interest based on their affinities. Examples include Elf Control, which shows a consumer filling up her shopping basket with Elf products to celebrate our premium quality and extraordinary value, and Elf Respect, which underscores the fact that we are cruelty-free and vegan. A YouTube brand list study that we commissioned found that digital ads had video completion rates of around 50%, and ad recall around 60%, both far above benchmarks. Based on our initial success, we chose to take up our marketing plus e-commerce spend to 14% of net sales for the quarter, and we expect spend to land in the 12% to 14% range for fiscal 2020. Our second strategic imperative is a major step up in digital. e.l.f. was the first digitally native mass beauty brand, and we've always focused on authentic engagement with our consumers. we continue to expand our digital presence and test new platforms. Last month, we sponsored the hashtag EyesLipsFace challenge on TikTok, a video and music platform with hundreds of millions of users and a huge following among Gen Z. The Elf Challenge encouraged people to record their own 15-second video to an original song, EyesLipsFace, which we commissioned from a Grammy award-winning songwriter. The campaign resulted in a number of firsts, including most views upon launch, first paid ad to hold the number one trending hashtag on TikTok, and first branded hashtag challenge to feature an original song. The response has been incredible. Over one and a half million videos have been created, the record for any TikTok brand challenge, generating a staggering 3.2 billion views. Our major step up in digital has resulted in increased elf presence across digital platforms. We recently reached 5 million followers on Instagram. Our Beauty Squad loyalty program now has over 1.5 million members. And most importantly, elfcosmetics.com and our retailer.com sites continue to show strong growth. Our third strategic imperative is providing first-to-mass, prestige-quality products at an extraordinary value. We know how to make products people want at elf speed. Our newest Holy Grail products like Poreless Putty Primer and 16-Hour Camo Concealer continue to perform well, supporting our leadership in the primer category and adding to market share gains in the concealer category. In the fall resets, we've also seen strong performance behind our $2 Wow Brow, 18-piece eyeshadow palettes, and our Total Face Sponge. We're also seeing strong success in skincare. According to Nielsen, for the 12 weeks ended October 5th, 2019, e.l.f. skincare sell-through was up 39%. Our recent innovations build on a foundation of e.l.f. products that have seen multi-year success and are still driving sales to make e.l.f. the number one mass brand for primers, eyebrow pencils, and brushes. We also continue to expand our reach through new product collaborations with key influencers. Last month, we introduced a collection with Nabella Noor, a Bangladeshi-American beauty influencer whose 1.2 million followers embraced her platform of self-love and inclusivity no matter your age, size, or skin color. The launch resulted in over 140 million impressions from leading beauty media outlets, including Allure.com, Refinery29.com, and TheZoeReport.com, as well as another 81 million reach through influencers. These results show the power of product collaborations to amplify the e.l.f. brand. Our fourth strategic imperative is to improve national retailer productivity through Project Unicorn. our multi-phase, multi-year package and self-initiative. As of the second quarter, the first two phases of Unicorn, which include most of our retail SKUs, are complete. We're pleased that Unicorn, alongside our marketing activation, has resulted in a meaningful step up in productivity. We remain the most productive brand on a dollar per foot basis at both Walmart and Target, our two largest customers. We're also growing productivity at Ulta Beauty, our third largest customer. Phase 3 of Unicorn is expected to roll out during spring resets and is designed to bring better visual merchandising to our key innovations. In addition to our national retail partners, we also saw productivity gains across our other channels with double-digit growth on our retailers.com sites and on elfcosmetics.com, where we're enhancing the elf consumer experience with capabilities such as machine learning and personalization. We also saw growth in our international business, especially in the UK, driven by Boots and Superdrug. Our fifth strategic imperative is to generate cost savings to help fuel brand investments. Our most important cost savings initiative was closing our 22 ELF branded stores in February. This was a difficult decision as it impacted half our employee base, but we moved boldly and with ELF values to do the right thing for our employees. I'm happy to report that we successfully exited our 22 store leases for well below what we expected at the onset of this transition. Redeploying the $13.7 million in annual spend that we use to invest in stores is driving greater momentum in our national retailer and elfcosmetics.com businesses. We're also making good progress on our automation and new plan initiatives in Southern California and hope to be operational by the end of this fiscal year. Another important productivity and cost initiative in the second quarter was executing price increases to help mitigate tariffs. Recall, we increased prices on approximately a third of our SKUs. This pricing action was the most significant in our almost 16-year history, as we've primarily used innovation mix to drive average unit retails. I'm happy to report that all our national retail partners have implemented the price changes and that our initial unit declines are lower than what we modeled. Pricing delivered approximately 200 basis points of the 11% net sales growth for the quarter. we will closely monitor the long-term impact as we move forward. The progress in our five strategic imperatives is encouraging. What gives me the greatest confidence in our future is the quality and dedication of our team. Over the past five years, we've hired 190 of our approximately 200 employees. Our team comes from blue-chip beauty and consumer backgrounds, and they love moving at alpha speed. I'm proud that our employee base is 75% female, 60% millennial and 40% diverse, reflecting the consumers that we serve. I'm also proud that of all the companies listed on U.S. exchanges, Elf is one of 37 companies with more than 50% women on the board. I have confidence in this team's ability to continue to recharge and grow the brand. It's an exciting time at Elf Beauty. We're pleased with the progress executing our strategic imperatives. These are long-term initiatives that we believe will build shareholder value. With that, I'll turn the call over to Mandy to discuss our financial results and guidance.

Thank you, Terang. I'm also pleased with the second quarter results and the initial impact of our strategic imperative. Let me cover the financial highlights of the quarter ended September 30, 2019, as compared to the three months ended September 30, 2018. Excluding ELF stores, net sales of $67.6 million were up 11% from a year ago, driven by increased productivity across channels, and the initial impact from price increases, partially offset by the lower holiday shipments that we discussed last quarter. For the first half, net sales were up 9% excluding ELP stores and up 5% on a two-year stack basis. Growth margin of 64% was up 300 basis points compared to prior year. The improvement versus last year was primarily driven by price increases taken in late July, along with margin accretive innovation, vendor concessions, and favorable foreign exchange rates partially offset by tariffs. Note that Q2 gross margin was higher than our forecasted run rate because we had the one-time benefit of higher pricing without the full impact of tariffs at the 25% level. We expect the full impact of tariffs at the 25% level in the back half of this year. As a reminder, our inventory value will also increase as we bring the tariffed goods into our warehouse, though unit inventory should remain relatively flat. On an adjusted basis, SG&A as a percentage of sales was 51%, up from 45% last year, primarily driven by increased investment in our marketing and digital initiatives and increased depreciation expense related to customer fixture programs. This is partially offset by cost savings from the closure of our 22 ELF stores. In Q2, marketing and e-commerce spend was 14% of net sales, compared to 7% in the year-ago quarter. On the last call, we discussed marketing plus e-commerce spend between 10% and 12% for the year, while reserving the right to take spend up based upon what we see on the top line. Given the top line results, we expect to see marketing spend at 12% to 14% for fiscal 2020. Adjusted EBITDA of $15 million was down 1% versus $15.1 million a year ago. Adjusted net income was $7.7 million, or 15 cents per diluted share, compared to $8.4 million, or 17 cents per diluted share, a year ago. We generated $4.1 million of cash flow from operations in the quarter, bringing our cash balance to $58.7 million as of September 30, 2019, compared to a cash balance of $33.6 million last year. The improvement was primarily driven by stronger operating results, partially offset by a decrease in other liabilities related to termination payments on store leases. In the second quarter, we repurchased approximately $1.5 million of stock against our $25 million share repurchase program, bringing the total amount repurchased to date to $2.5 million. Our investment priorities remain focused on our five strategic imperatives as well as strategic extension. Now turning to our fiscal 2020 guidance. We expect net sales to be up four to 6% versus fiscal 2019, excluding the impact of health stores. This is up from the negative four to flat range previously guided. We expect adjusted EBITDA between 52 and $55 million, adjusted net income between 23 and $25 million, and adjusted EPS of 44 to 48 cents per share on a fully diluted basis with a share count of 52 and a half million. We continue to expect our tax rate to come in at 28% for the year. The raise in guidance this quarter reflects the momentum we're seeing in our top-line sales. We are balancing that momentum with the backdrop of a soft color cosmetics category, as well as monitoring the impact of pricing on a longer-term basis. As a reminder, we expect to see a $6 million impact on net sales in Q3 from cycling a larger holiday program and pipeline in the third quarter last year. Additionally, we will face a tough comp in the fourth quarter as we anniversary the poreless putty primer and 16-hour camel concealer launches. The organic influencer activity around those launches resulted in a halo effect that drove strong sales in the year-ago quarter. From an adjusted EBITDA margin perspective, we are maintaining our 19% to 20% margin expectation for the year. As I stated earlier, in Q2, we had the one-time benefit of pricing without the tariff offset at the 25% level, which drove higher margins. Overall, the 19% to 20% range is consistent with what we've expected since the beginning of the year. Before I turn the call over to questions, I want to reiterate that we are encouraged by the positive top-line trends we're seeing and the direction the business has taken over the last few quarters. We remain focused on executing against our strategic imperatives. With that, operator, you may open the call to questions.

Thank you. We'll now be conducting a question and answer session. In the interest of time, we ask that you please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first question comes from the line of Steph Wissink with Jefferies. Please proceed with your question.

Thank you. Good afternoon, everyone. We have a question and then one clarification, if we could. The question, Terang, is for you. Just broadly speaking, as you step back and look at what's happening in the color cosmetic space, can you give us some sense of where you feel like you're providing the consumer an advantage, whether it's through product innovation, price advantageousness, or just providing a better experience at retail? Why do you think you're able to buck some of the trends we're seeing? And then, Mandy, for you, just clarification on the tariff impact. Can you remind us what percentage of your business is coming from China? What percentage we should think about would have that gross margin effect of a 25% increase? And then how have you been working with your vendors on the concession side? How should we think about tariffs in totality for the year in terms of the impact? Thank you.

Hi, Steph. Well, in terms of our consumer advantage, I really do think it comes to the heart of our overall proposition of providing the best of beauty and making it accessible to every eye, lip, and face. And reestablishing that core mission and our ability through these five strategic imperatives to do so. I think that's how we're bucking the trends in the category. I think the category in the 12th period ending October 5th was down about 4% on a track basis. our ability to kind of pick up 70 basis points of share in that category is a direct reflection on the five strategic imperatives I just kind of reviewed, which really go back to the core fundamental proposition that we offer consumers.

And then, Steph, on the tariffs. So about 70% of our business is subject to the tariff at the 25% level. The remaining 30% is subject at the 15% level. Now, there were – lashes and some smaller things that were impacted by the September 1st tariff. And then there's the December 15th tariff that will be coming, and that impacts our brushes and tools business. And in terms of how we're working with our team there in China on vendor concessions, again, you know, they are always tasked with finding savings, and that's no different for this year. And so our team is actively generating savings to help offset some of that tariff impact.

The last thing I would say is a balanced approach. So we are benefiting from both FX, the cost savings initiative Mandy talked, and we're particularly pleased with the execution we've had on pricing. Recall our approach on pricing was we took about a third of our SKUs up in price. We did not do a peanut butter approach. We really targeted where we thought we had the best consumer value. And the consumer response to that's actually been quite strong. I mean, it generated about 200 basis points of our 11% sales growth. So we're really pleased with pricing, at least in these early days.

Thank you. Our next question comes from the line of Oliver Chen with Cowan & Company. Please proceed with your question.

Hi. Thank you. Congrats on solid results. Regarding pricing, you've had a nice momentum there. What are your thoughts in learning – from what you're doing going forward with pricing and also a terrain in the context of the market trends you're seeing in terms of the software color cosmetics and the promotional environment at competitors and department stores and others. Would love your thoughts on how that might manifest as well as phase three unicorn and what are some of the factors you're monitoring around phase three that we should also pay attention to. Thank you.

Hi, Oliver. I would say on pricing, building on my last comments, the execution has done better than we expected, mainly because we really did focus on making the right value equations and taking a consumer-centric approach to pricing, including not touching pricing on some items where we really wanted to make a statement, like our $2 brow products, which are doing extremely well. In terms of going forward, I think we are cautiously looking at the market overall, just given how many different brands will be taking pricing. As the leader of the value segment, we very much led pricing in our segment, and we've since heard a number of competitors announce they're taking pricing. In this past period, we've seen some of those start to be reflected on shelf, others not. So we'll want to take a look at what happens to consumer behavior as other prices go up. In terms of other initiatives, Unicorn certainly has helped our productivity and helped us kind of weather the pricing at our national retailers where we've seen a pickup in productivity. Phase three really is focused on better visual merchandising on our key innovations. If I think of phase one and two, which are now complete, while they're the majority of our SKUs and have done a really great job, we believe there's a further opportunity to really make sure that we're highlighting these holy grail first to mass products that we uniquely can offer the consumer. And that's really much what phase three is going to be about.

Okay. And just to follow up on the holiday, you've done a really good job executing on gifting in the past. What are your thoughts about what you're focused on this holiday versus last year and how the consumer and trends might be shaping up as The holiday period is a little bit different this year, and there's mixed headwinds and tailwinds. Thanks.

Sure. So holiday is always an important program for us, I'd say especially with Target, which is our longest-standing customer who's always done a really nice job on their holiday program. As Mandy mentioned, this year we do have a smaller holiday program planned. I think, you know, as we looked across various customers, really our level of holidays probably will be a bit smaller this year. But I'm especially excited by overall presentation and offering. In fact, if you go on elfcosmetics.com right now, you'll see our holiday gift guide as well as our kind of a core assortment. I think it's the best assortment we've had and the best program we've had on holiday. So while the overall program size will be smaller, it continues to play an important role in terms of elevating the brand and bringing greater awareness to us.

Thank you. Best regards.

Thank you. Our next question comes from the line of Andrea Texiera with J.P. Morgan. Please proceed with your question.

Hi, good afternoon and thanks. So I was hoping to clarify if the new guidance embeds more doors or more displays than before or just higher velocity. And on the tariff impact, is it fair to say that because you took pricing in July and obviously you're mitigating as Tarang and Mindy said, mitigating with cost saves and also with the effects working in your favor, Is it fair that all things equal, you're probably going to have a margin expansion into the next few quarters until you have the full impact of the tariffs and also because of the timing of your inventory?

Okay, yeah, I'll take those questions, Andrea. So just to clarify on the new guidance, no, it does not include any new doors. It really reflects the momentum that we're seeing in the business coming out of the first half of the year, balanced with the other items that I called out in my prepared remarks. On the tariff side, so we are mitigating the tariff impact, but I will say that in Q2, we saw a one-time benefit is how I would characterize it from pricing. As that inventory starts to roll in, to your point, we will start to see margins erode. And so I would not say that I expect to see a margin benefit in the back half of this year. We do expect to start to see that 25% tariff level as we enter the back half.

Okay, that's fair. Thank you.

Thank you. Our next question comes from the line of Aaron Murphy with Piper Jaffray. Please proceed with your question.

Hi, team. It's Eric Johnson. I'm today for Aaron Murphy. Thanks for taking the questions for us. First, I was curious if you could update where you are at on the beauty squad. I think you were over a million members last quarter, and I know you've added some personalization elements and other improvements. So I'm just curious what you guys have learned there over the last 90 days or so.

Sure. We're excited about our Beauty Squad loyalty program. We're now up over 1.5 million members. As we talked on our last call, we continue to add functionality and benefits features to that program, including receipt scanning. Some of the key, as I mentioned, some of our key initiatives in machine learning and personalization include kind of dynamic product recommendations, customized messaging across our various platforms, including email and text. and then optimize media placements on the Beauty Squad loyalty program, and that's benefiting the brand overall. And on the Beauty Squad loyalty program, it's also benefiting as is receipt scanning. So we remain bullish on Beauty Squad to really be able to drive the brand and help propel elfcosmetics.com, which is seeing even stronger growth than our overall national retailer business.

Great. Thank you. That's really helpful. And then on the marketing mix, it's been fantastic. Encouraging to see that upsized here and the guidance parameters for that raise. What channels are you specifically seeing the best return on that incremental spend? Is there any one, two, or three places you'd point us to to monitor?

Sure. So the great news with our overall marketing activation is we're seeing strength across all channels. So we've seen growth across our national retailer business, elfcosmetics.com, and retailer.com. And so we feel great about the growth, how broad-scale the growth is across all channels. Certainly our digital channels, given much of the spend is digitally oriented, are growing even faster. That includes both elfcosmetics.com as well as our retailer.coms. but there's great growth across each of them.

Okay. Thanks, guys. Best of luck.

Thank you. Our next question comes from the line of Bill Chappell with SunTrust Robinson Humphrey. Please proceed with your question.

Thanks. Good afternoon. Good afternoon. Hey, Bill. Can you just, I guess, try and understand how much of the impact of both pricing and tariffs were in the quarter and with the thought that I assume Pricing went through September 1, and then the tariffs of the products that kind of started to hit or impact you probably was around that same time as well. So is that the right way to look at it? You probably had about a third of the impact on both pricing and tariffs, and you'll get the full impact this quarter?

Yeah, so I think the right way to think about that, Bill, is when we talk about the tariffs that impacted Q2, that's still at the 10% level that we're looking at. we didn't really have a lot of the 25% level creep into Q2. We'll see that in the back half of the year. So you should expect the full impact of tariffs as we go into the second half at the 25% level. On the pricing side, so our pricing implemented in late July. So there's nearly a full quarter's worth of pricing included in the numbers for Q2.

Okay, perfect. And then to rank, as we look forward to the resets next year, Any color you can give us both on incremental shelf space at key retailers that you expect and or kind of new product launches? I know in the past part of the issue was getting all the products that you wanted into the retailers at the right time, and so just kind of understanding how that works for the spring resets.

Sure. So our – Incremental space, we usually don't comment on until after it started being implemented. So for this year, the only space assumptions that we've previously disclosed are we did pick up additional space in a subset of Alta doors. We did pick up distribution at Walgreens and Boots. And then as part of Unicorn, we have, I think, much better merchandising as part of Unicorn. I'm particularly pleased. with the flex towers that we have at Target. They really showcase our leadership segments. It almost looks like a space expansion for this year. And so we'll continue to build on that momentum as we enter the spring resets next year and continue to partner with our key retailers. So we will talk about space really when we're talking about kind of next fiscal year versus now. And a lot of that just has to do with our customers don't like letting their competitors know what they're doing with ELF. In terms of new items, that clearly has been one of the big drivers of our success. So if I think of poreless putty primer, 16-hour camel concealer, as well as some of the new items I just mentioned, they really do fuel consumer interest since we uniquely can bring those types of items to the market at our accessible price points. And so we already have talked with our retail customers in terms of what items they'll be accepting. Unicorn is a great enabler because it helped us pick up kind of that space and that efficiency by which we have confidence that we can get a number of those new items into the spring resets. And as part of phase three, highlight and present them even better than we do right now. So I feel good about our pipeline and the number of new items that we have coming.

Great. Thanks for the color.

Thank you. Our next question comes from the line of Linda Bolton-Weiser with DA Davidson. Please proceed with your question.

Hi. I was curious if you could just comment on the Phase 2 of the Project Unicorn, which I believe has to do with your brushes, and also related to that, in examining some of the IRI data, it does look like some of the bigger volume declines were in the area perhaps of brushes and accessories and tools, things like that. Are you going to be making any further pricing adjustments so that you can increase the effectiveness of the overall pricing strategy, or are you quite satisfied with the way things are now? Thanks.

Hi, Linda. So I'd say phase two of Unicorn is now complete, which did include all of our brushes. And a big part of that initiative was an insight we had that single brushes are we're facing greater headwinds since I would say where the consumer is migrating to, which is brush kits as well as sponges. And so what phase two of unicorn allowed us to do is actually fit in a few more of our brush kits where we can have, you know, incredible brushes at this extraordinary value every day, as well as our total face sponge, which is picking up quite a bit of share in the sponge category, which, which happens to be, um, quite fast growing. So as I step back and take a look at overall tools, accessories, we look at brushes, we look at some of our other tools, and we look at sponges. And when you mix those in, we're pleased with what we saw through phase two.

And then on the pricing question there, Linda, so brushes, as you probably can see through the data, the AUR is higher, and so they were impacted by pricing, but As to my earlier comments on wanting to see the longer-term impact on pricing, that is why we're kind of taking this balanced approach to make sure that we understand how each item is impacted by pricing. But to Terang's point, we're pleased with what we see thus far.

Great. Thank you very much. Thank you. Our next question comes from the line of Rupesh Park with Oppenheimer and Company. Please proceed with your question.

Good afternoon, and thanks for taking my questions. So to start out, a housekeeping question for Mandy. So I was curious if you have an updated gross margin expectation for the full year.

So I would say for the back half of the year, you have what the front half actualized at. So for the back half of the year, I would continue to use the 60% margin that I have quoted all year long. That is kind of the run rate margin excluding stores that you should continue to use. as we go throughout the rest of fiscal 2020.

Okay. So it's essentially unchanged from your prior forecast.

All right. Yep.

Okay. Okay. And a question for Tarang. So skincare, another quarter of strong growth. I was curious if you can just give some more color in terms of what's contributing to that growth and whether you're seeing more retail interest in your skincare offering.

We're really pleased with skincare. As a reminder, we entered skincare about three years ago relative to the almost 16-year history we have in color cosmetics. Yet the same model holds in skincare where we can bring the best of skincare and make it accessible to our consumers. So what's driving skincare this year really is a continuation of the innovation we have on skincare. Our Hello Hydration skincare cream has done extremely well. as has the rest of kind of the lineup. And that's what you're seeing in what I quoted, which is the tracked data in Nielsen with skincare for the quarter being up 39%. In addition to the tracked channel data, and Target is a huge driver of skincare for us, you also have non-tracked skincare. I'm not going to give the numbers, but Ulta did take skincare full chain this year. So it's our second year of Ulta. They expanded color cosmetics in all doors last year. They've now expanded skincare in all doors this year, and we're seeing great traction there as well. Okay, great. Thank you.

Thank you. Our next question comes from the line of John Anderson with William Blair. Please proceed with your question.

Good afternoon, everybody. Thanks for the question. Good afternoon. Trey, you mentioned international and the prepared comments. I'm wondering if you could talk a little bit more about the overall kind of trends or growth rates you're seeing in your international business and opportunities for additional distribution expansion.

Absolutely, John. I would say our international business has similar trends to the rest of our business in terms of the breadth of the growth that we're seeing. International is no different. In particular, I would point out the UK, which has been our probably biggest focus. Last year, as I mentioned, we had done full chain at Superdrug. It's good business at Superdrug. This year, Boots is starting to expand out the brand. In both customers, we're seeing very strong growth in addition to our elf cosmetic site in the UK. So it's a good indication of our strategy on international, which is it's not a big bang strategy. You're never going to hear us talk about entering 30 countries at the same time. It's really the same disciplined rollout that we had kind of in the US when we went from one customer, really made sure we had a good foundation there and then went to another. I'd say the same thing's true on international. You'll see continued focus in the UK. We've previously mentioned we are testing the brand in Germany and some other key markets and are quite keen on our China e-commerce effort as well. So look forward to continue to provide updates, but it will be this disciplined rollout that we'll use internationally. And part of it is we have such a big opportunity remaining in the US with the white space we have here with space and customers.

That's helpful. Just pivoting back to skincare for a minute. Could you describe your kind of ACV or distribution skincare relative to your distribution domestically in color cosmetics? And just to kind of get a sense of the opportunity there. And then are you happy with how your skincare products are being merchandised at retail? Are they co-located with your color cosmetics? Are they in different aisles? And is there opportunity for enhancement there?

We have major white space when it comes to skincare from a distribution standpoint. We're not distributed nearly as broadly as we are with Color Cosmetics, nor with the same type of footprint. I'd say the two primary customers we have from a national retailer standpoint, in addition to elfcosmetics.com, which you can find our entire skincare range on, are really Target, which really led skincare with us, and Ulta Beauty. And at Target, where we do have larger shelf sets, skincare is co-located with our overall cosmetic session. We prefer that type of location where a consumer who's looking for e.l.f. can go across the entire regimen, really tying into the insight of we need good skin to have good makeup coverage, and Target really does lead our skincare business given that co-location. Ulta Beauty decided to put skincare in a separate area, actually in their skincare set. We originally, I don't think we're crazy about the idea, But they tested it. It did so well that they decided to take it full chain. So we have examples of both areas. Our preference, I think, would be to locate it if we have enough space within our main set. And you'll see us continue to expand the distribution on skin care given how well it's done at both Target and Ulta.

Excellent. I'm going to squeeze one more in quickly. Could you give us an update on the in-house production effort timing there and if there's anything to consider in terms of that changing kind of your margin there? the margin profile of the business over time.

Thanks. Sure. So we have two main initiatives when it comes to our operations in the U.S. The first was automation, both automating our e-commerce line in Columbus, Ohio, as well as one of our main lines in Ontario, California. Those automation efforts are now mainly complete and we're reaping the benefits of that from a cost-saving standpoint, as well as efficiency and our ability to reach consumers faster. The second major initiative is building a plant in Southern California, not that far from our distribution center. That plant should be operational by the end of our fiscal year. And importantly, we made plans for that plant well before tariffs. It really was, if we're going to automate certain aspects of our operation, think of liquid fill in a bottle. It made sense to put that automation here in the United States near our distribution center, both from a speed advantage as well as cost. Certainly that plan is looking even better in a tariff environment where there are additional savings associated depending on what happens with tariffs. So I'd say well on track on both those initiatives. The last thing I will tell you is the majority of our manufacturing will continue to be in China where we have a major advantage on the combination of cost, quality, and speed. And so we take a global view when it comes to overall supply chain and like the progress we're making on initiatives, including the progress we're making with lean in China.

Thanks. Congrats on a great first half.

Thank you.

Thanks, John.

Thank you. Our final question comes from the line of Mark Astrichen with Stiefel. Please proceed with your question.

Thanks, and afternoon, everyone. I guess one just follow-up on the last line of questioning. Given the strength in the business at this point, maybe some sort of thoughts on cash markets. use beyond the facility you're talking about. CapEx doesn't seem to be that elevated. So you're in a fairly good position at this point leverage-wise to maybe talk a bit about what you can do there. And then more broadly, innovation, you touched on it before, has been a huge driver of growth in the business. I guess I'm curious, given how successful it's been, has it surprised you to the extent that it's driven growth If so, kind of what were the takeaways from it and how do you think about the ability to lap that, meaning without giving us details of what's coming, you know, what do you think about in terms of opportunities on a go-forward basis?

Yep. So I'll take the first one, Mark, on the cash use. So we really feel great about our cash position right now. We are able to fund our strategic imperatives. And we've talked about potentially pursuing strategic extensions over time. So I think when you are thinking about our cash use, those would be the areas that we would focus on. You've also seen us do modest repurchases, which you've seen in the last two quarters. And we'll continue to blend that in as it makes sense in the context of those strategic objectives.

And then on your question on innovation, that has been a critical driver of our business for a very long time. I think one of our realizations last year when the business slowed was we had great innovation, but it was getting lost in all the other noise of the marketplace. So one of our key imperatives in stepping up our marketing activation spend in digital was really making sure we're putting enough emphasis on those items that most mattered. So I think the biggest pivot we had is we still innovate with the products that consumers want at elf speed. The biggest pivot, though, was really making sure we're shining a light on those innovations that the consumer is particularly interested in. That was very much the case with poreless putty primer and camo concealer, and I would say they still have a lot of life left in them, if you think about the very beginning of this year. We were supply constrained on both those items. As we continue to activate, as customers get behind them, we continue to see them do quite well. Some of the more recent innovations I discussed on the call today also have quite a bit of room, and I'm really excited about the pipeline we have coming forward. So probably the biggest opportunity I would say on innovation is beyond our proven capability of bringing the best of beauty and making it accessible for every eye, lip, and face. It's continuing to amplify innovation. those innovations and goes hand-in-hand with our shelf initiative with Project Unicorn, where we can better highlight what are those innovations that we believe will be most important to consumers. Thank you.

Thank you. We have reached the end of our question and answer session. I'd like to turn the call back over to Mr. Amann for any closing remarks.

Great. Well, thank you, everyone, for joining us. Over the next month or so, a number of members of our team are going to be investing – attending investor events in San Francisco, New York, and London. We hope to see you there. Thanks, everyone.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.