e.l.f. Beauty, Inc.

Greetings and welcome to the Elf Beauty Incorporated third quarter fiscal 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Willa McMahonman. VP of Investor Relations and Corporate Communications. Ms. McMahonman, you may begin.

Good afternoon, everyone. Thank you for joining us today to discuss Elk Beauty's third quarter fiscal 2020 earnings results. 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 and long-term model, 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 gap measures. With me from management today are Tarang Amin, Chairman and Chief Executive Officer, and Mandy Fields, Senior Vice President and Chief Financial Officer. Tarang will begin the call.

Thank you, Willa, and good afternoon, everyone. We're pleased with our third quarter results with net sales of $81 million and adjusted EBITDA of $21 million. Excluding ELF stores, net sales were up 8% versus a year ago. In the 12 weeks ended December 28, 2019, our dollar share of the color cosmetics category was 5%, up 40 basis points versus a year ago, even with the short-term impact of a smaller holiday program. For calendar year 2019, of the top five mass color cosmetics brands in Nielsen, we grew the most market share. Reflecting our strong results, we are again raising guidance. We've driven these results through a relentless focus on five strategic imperatives that we've discussed with you over the past year. Let me give you a brief overview of each imperative, how our strategy works together, and why I'm encouraged about our long-term potential. Our first strategic imperative, driving demand in the brand, continues to exceed our expectations with success across platforms. Marketing and e-commerce spend for the quarter was approximately 11.5% of revenue, versus 7% a year ago. This rate was about 150 basis points below our objectives due to the timing of some of the spend, which was pushed into the fourth quarter. We are measuring the success of our investments primarily by looking at top-line growth alongside internal metrics on reach, conversion, and engagement, as well as external metrics like Google search and earned media value, all of which exceeded our expectations. Last quarter, we discussed our Elfing Amazing campaign. Based on its success, this month we are launching the second phase of our awareness campaign, which will further amplify our ELF mission of making the best of beauty accessible to every eye, lip, and face. We previously shared the early results of our Eyes with Face TikTok Challenge. The challenge has now garnered over 4.4 billion views on TikTok, with over 3 million user-created videos, a record for any brand challenged. While these numbers are impressive by any measure, it's our ability to seize on social momentum that we want to underscore. We started the campaign by creating an original 15-second eyes-lips-face song as a backdrop to user-generated videos. By the campaign's close, this evolved into a full-length eyes-lips-face music video in conjunction with Billboard's 2019 Label of the Year, Republic Records. Throughout this TikTok journey, we learned the importance of being nimble and open to new approaches to connect with our consumers. It also showed us that strong partners are an imperative in this new digital landscape. Among many awards and accolades, Adweek called Islip's face the most influential campaign on TikTok, and we were also featured by Forbes as one of the 14 social campaigns that rocked 2019. With a similar eye to innovation and partnership, in November, we proudly hosted ELF's fourth annual Beautyscape event, which reflects our brand values of empowerment and paying it forward. This year's Beautyscape built on prior year's events with an amped up vision, including two and a half times the entrance compared to 2018. Finalists joined us in the Bahamas to connect with beauty industry leaders, including keynote speaker, entrepreneur, and celebrity hairstylist, Jen Atkin. Attendees who are handpicked for their vision and love of beauty attended master classes and lectures to take their careers to the next level. Ultimately, they competed in teams to present their best original color cosmetics capsules. The winning team received a cash prize and together will introduce their elf collection this summer, exclusively through our national retailer partner, Target, who also attended Beautyscape. As we continue to explore new ways to tell our story, we are humbled at the recognition our branding efforts are receiving. We recently won three Creative Media Awards, including Best in Show. We've also been nominated for three Webby Awards and two Reggie Awards in January alone. Our efforts continue to result in more social followers as well, with our Instagram followers reaching over 5 million, up 27% versus a year ago. Our second strategic imperative, a major step up in digital, goes hand in hand with driving demand in the brand. Our digital efforts center on seamlessly tying together our channels to offer a consistent health experience. As part of this effort, our tech stack integration is becoming increasingly more sophisticated. Elf was front and center at Salesforce's Dreamforce Conference as the only beauty company utilizing the entire Salesforce cloud platform across commerce, marketing, and customer service. To highlight a few of these digital initiatives, in the third quarter, we launched Elfie, our customer service engine to serve our e-commerce consumers 24-7. We made progress enhancing personalization to make the consumer journey more engaging for our 1.6 million Beauty Squad members who account for over 65% of our e-commerce sales. Our personalization efforts offer us a single view of the consumer, allowing us to incorporate past purchases, views, and likes to customize what's being served to them online. In conjunction with this, we saw solid results in the early phase of receipt scanning, connecting us to even more data to enhance the Beauty Squad experience. To make purchasing ELF easier, we've implemented Afterplay and Google 360 so ELF consumers can pay in the way that best suits them. Perhaps the most exciting is the launch of our new mobile app on Apple and Google, which will further enable receipt scanning and personalization. Our third imperative of providing first-to-mass, prestige-quality products continues to drive competitive advantage. We've mentioned the success of our holy hydration skin cream, 16-hour camo concealer, and poreless putty primer, all of which were introduced around this time last year. We're building on these proven Holy Grail products with extensions including Holy Hydration Fragrance Free, Hydrating Camo Concealer, and Luminous and Matte Putty Primers. These extensions were created in response to ELF consumer requests. Additionally, we're introducing new Holy Grail products like our Liquid Glitter Eyeshadow, which is $5 compared to its $24 prestige equivalent. These products are bringing new consumers into the brand, with 65% of Liquid Glitter Eyeshadow purchases on elfcosmetics.com coming from new customers. Beyond liquid glitter eyeshadow, we're encouraged that five of our top 10 SKUs on elfcosmetics.com are recently introduced items. Our ability to deliver a stream of new products that deliver the best of beauty at extraordinary value continues to fuel our strategic imperatives. One of our key areas of focus is expanding our skincare offerings. We are seeing success with core products like Holy Hydration Cream and Hydrating Booster Drops. We also continue to push into new areas, such as our cannabis sativa line, which has maintained a steady pace in our top five sellers on elfcosmetics.com since its introduction in November. Our overall skincare business continues to show strong growth, up 35% in track channels in Q3. Unicorn, the project that guides our fourth strategic imperative of improving national retailer productivity, is entering its third phase centered on better visual merchandising at shelf. Going into spring resets, we're implementing over 100 different planograms across our retailers, each featuring new visual merchandising. In terms of shelf space, we've confirmed some additional space in grocery and at Boots in the UK. We expect further space decisions from other retail partners later in the year. Unicorn is also driving better merchandising results, as we continue to see strong productivity across our national retail partners. Perhaps the best example of this is our Target Flex Towers, which provides us both incremental space and a vehicle to showcase our new products. The next wave of these Target Flex Towers shipped in the third quarter, which partially offset the impact of a smaller 2019 holiday program. Performance at other national retailers was strong, with one highlight being skincare momentum across the full chain at Ulta Beauty. Our overall international business was down in Q3 as we reduced reliance on international distributors. We made the shift in the UK several years ago, and it's paying off today. In the third quarter, growth within our key UK retail partners, Boots and Superdrug, was particularly strong. We expect that momentum to continue as we look to more than double our presence at Boots over the next 12 months and expand space incrementally at Superdrug. In the third quarter, we held our first ever large-scale consumer event in the UK at Glamour Beauty Festival with nearly 5,000 attendees. The enthusiasm we saw there was reflected in UK beauty awards from Cosmo, Glamour, and Gloss, and a five-fold increase in our earned media value in the UK. We were also honored to receive a supplier award from Superdrug for Best New Cosmetics Launch in 2019 for our Poreless Putty Primer. In other markets, our most significant activity for the quarter was bringing our China e-commerce business in-house from a distributor, which will allow us to better control pricing, marketing, and the pace of new product launches. This was an important move to begin penetrating the China market in a more meaningful way. In terms of China, we're closely monitoring developments regarding the coronavirus. We would note that our ELF offices, labs, and key suppliers are at least 500 miles from Wuhan. We have a deep and geographically diverse supply chain within China. It is too soon to know the impact to our operations other than a later startup post-Chinese New Year. We have an amazing ELF team in Shanghai and strong network of suppliers who we just saw during our annual supplier summit, and we're working closely with them. Our thoughts are with our colleagues and those impacted by recent events. Turning to our fifth strategic imperative of generating cost savings to help fuel brand investments, I'll reiterate that our most important cost savings initiative was closing our 22 ELF branded stores last February. We redeployed the $13.7 million in annual spend on stores to our strategic imperatives, particularly driving demand in the brand. We're also seeing benefits from the automation of our warehouse facilities. Our new liquid-fill manufacturing facility in Southern California should start operations in the next six weeks. Mandy will discuss what we're seeing in terms of price increases and tariff dynamics, but in summary, they remain favorable and a driver of our gross margin progress. Make no mistake. Our execution of these five strategic imperatives has led to growth in a down category. We will provide FY21 guidance during our Q4 call. Meanwhile, I'd like to step back and touch on our longer-term model for the company. Over almost 16-year history, we grew in every year except calendar 2018. This year, it was critical for us to reestablish growth. Having done so, I'd like to share what we're seeing in the model over the next three years. With the momentum we're building in the brand, we believe we can continue to grow share. We also believe we have an opportunity to grow shelf space significantly at our current national retailers and in new markets internationally. Space gains are episodic, and even when we get that space, it often takes time to optimize shelf productivity. That's why our focus has been on executing our strategic imperatives. With growth, innovation, and a brand that consumers love, we believe we'll earn more space over time. Over the next three years, without major additional space or strategic extensions, we expect compounded annual top-line growth in the low to mid-single digits. As we layer in potential space gains and strategic extensions, we believe this is a business that should grow in the mid to high single digits. In both cases, we see leverage that comes with sales growth. We expect adjusted EBITDA growth to outpace net sales growth. We believe that this model of balanced growth in both the top and bottom line makes for an attractive long-term business. One of the things that gives me confidence in our model is our success in growing gross margin from 42% just a few years ago to over 63%. There was concern earlier this year on the impact of tariffs, which we have so far successfully navigated with a slight expansion in gross margin. We've taken much of this historical margin expansion and reinvested it in the business, first in the form of team and infrastructure and more recently in brand support. We believe that the team and capabilities that we have built can be leveraged for additional growth opportunities. Our strong cash position of almost $75 million at the end of Q3 gives us the opportunity to pursue strategic extensions that can further leverage our capabilities and differentiate our brand portfolio. We believe good uses of cash include small tuck-in acquisitions in adjacent categories or spaces, as well as creating our own brands. We believe such strategic extensions, in combination with our strategic imperatives, provide further confidence in the short-term as well as longer-term growth potential. With that, I'll turn the call over to Mandy.