Thank you for joining us today to discuss e.l.f. Beauty's Second Quarter Fiscal 2021 Results. I'm KC Katten, Vice President of Investor Relations. With me today are Tarang Amin, Chairman and Chief Executive Officer; and Mandy Fields, Senior Vice President and Chief Financial Officer. We encourage you to tune into our webcast presentation for the best viewing experience on the content we're presenting which you can access on our website at investor.elfcosmetics.com. Please note after the presentation, there's a separate dial-in for the Q&A session also noted in the press release. Since many of our remarks today contain forward-looking statements, please refer to our earnings release and reports filed with the SEC where you'll find factors that could cause actual results to differ materially from these forward-looking statements. 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 measure. With that, let me turn the webcast over to Tarang.

Thank you, KC and good afternoon everyone. I hope that you're staying safe and well. Today, I will talk about the fundamental drivers behind our second quarter results, our growth opportunities, and the overall strategic framework for our company. I am so proud of our e.l.f. Beauty team for delivering strong results in the second quarter as we continue to navigate major category headwinds as a result of COVID-19. This is our seventh consecutive quarter of net sales growth with Q2 net sales of $72 million, up 7% versus a year ago. We expanded gross margin to 65%, up approximately 100 basis points versus last year and delivered adjusted EBITDA of $14 million, while increasing our investment in marketing and digital. We continue to grow share in the quarter with 5.5% of the color cosmetics market, up 100 basis points versus a year ago. We also took important next steps in our transformation to a multi-brand portfolio with the unveiling of Keys Soulcare, our groundbreaking new lifestyle Beauty brand with Alicia Keys and the launch of our recharged W3ll PEOPLE plant-powered Clean Beauty brand. Before Mandy goes into more detail on our results, I want to share the key pillars underpinning our performance and talk about why I'm optimistic about the future of our brand portfolio. Our strategy is working. We came into this volatile period from a position of strength. Our superpowers that center on our ability to deliver 100% cruelty-free premium quality beauty products at accessible price points with universal appeal are more important than ever before. The focus work behind our five strategic imperatives has continued to drive our outperformance relative to the category trends. We believe the strength of our platform gives us the ability to drive even greater value through strategic extensions like a Keys…

Thank you, Tarang, and thank you all for joining us this afternoon. Today I'll cover our Q2 financial results and fiscal 2021 guidance. We are quite pleased with our Q2 results. We delivered net sales of $72 million, up 7% from a year ago. This growth was mainly fueled by ongoing strength in e-commerce and international, as well as growth in tracked channels. We also saw sequential improvement in our performance at Ulta relative to Q1, as stores reopened. From a cadence standpoint, tracked channel sales growth moderated through the quarter, as expected, as stimulus dollars dried up and we cycled the price increase implemented last year. Gross margin of 65% was up approximately 100 basis points compared to prior year. Similar to the last several quarters, we saw gross margin benefits from margin accretive product mix and cost savings, a favorable FX impact and a mix shift to elfcosmetics.com. These benefits were partially offset by the impact of tariffs and certain costs associated with space expansion. Additionally, our year-over-year gross margin improvement moderated relative to last quarter, as expected with cycling the price increases we took last year. On an adjusted basis, SG&A as a percentage of sales was 51% or approximately flat compared to last year at 51%. The marketing and digital investment for the quarter was approximately 15% of net sales versus 14% a year ago. For the first half marketing and digital spend as a percentage of sales was 14%, in line with our expectations. Q2 adjusted EBITDA was $14 million, down 4% to last year and adjusted EBITDA margin was approximately 20% of net sales. Adjusted net income was $8 million or $0.16 per diluted share compared to $8 million or $0.15 per diluted share a year ago. Our liquidity remains strong with the combination…

We will now begin the question-and-answer session [Operator Instructions] Our first question comes from Erinn Murphy with Piper Sandler. Please go ahead.

Great. Thanks and good afternoon. My question is around inventory. The balance was up kind of 26% I believe at the end of the quarter. Could you just maybe walk through some of the components around, how much were shelf space gains, maybe the operational hiccups excuse me that you saw in the quarter? And then maybe the build for Keys Soulcare? And then where do you expect inventory to be by the end of the third quarter?

Hi, Erinn. So let me first say that, we feel great about our inventory levels. As you look at the cash flow statement, March was particularly low as we were managing through the initial onset of COVID. And so as you look at our inventory today, we've talked about pipeline that is related to space gains. We also talked about the system migration issue that shifted inventory from Q2 into Q3. And so – and also you mentioned space gains picked up within the quarter. All of those things are playing a role into our current inventory balance. And we feel like we're in a much healthier place right now.

Okay. And then, if I could ask a separate question on Keys Soulcare. Could you just maybe walk through the broader launch plan is we think about 2021, just given the price point positioning are there – is there an opportunity to work with new retailers that maybe you don't work with currently with both W3ll PEOPLE and e.l.f. and just help us think about the cadence as we look to the end – or next year excuse me? Thank you.

Hi, Erinn. We're really excited about our launch on Keys Soulcare. So as you know, the site is already up and running keyssoulcare.com. We led with content, community and conversation, and the response has been terrific so far in terms of how people are responding to this new beauty lifestyle brand. In December, December 3rd, we started our commerce with our first three items Sage, Oat Milk, Candle as well as two other skin care products that will go on sale on keyssoulcare.com, as well as Ulta Beauty, in ulta.com. In early 2021, we'll expand that range to a full line of skin care products, so both online on keyssoulcare.com, as well as ulta.com, and then later in Ulta Beauty stores. So we're quite excited about the full range that will be going out the door by the end of this fiscal year, and have plans beyond that to enter other categories, and new other products as our normal cadences.

Great.

As well as – yeah, thank you. And I should just add our initial – the only customer that we've disclosed so far is Ulta Beauty, where we'll be exclusively in the U.S. in the coming months, we will also discuss some of our global retail partners as this will be a global brand in 2021.

Excellent. Thank you, Tarang, and Mandy.

[Operator Instructions] Our next question will come from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Hi. I guess, I can do the math on this, but if you were to exclude the incremental spending on the Keys Soulcare launch, I think you said, it was $5 million to $6 million. Would EBITDA be up year-over-year in the second half? Thanks.

Hi, Linda, yes. So as we look at the full year, the $5 million to $6 million we're layering on for Keys Soulcare, if you take that out, we would be $5 million to $6 million higher on the year from an EBITDA standpoint. So that would put you ahead of last year, if you look at the guidance range we provided.

And then can I just fit in longer term, you're very committed I think to growing your EBITDA faster than your revenue growth, as a long-term objective. Is that the case, even in years where you may have future launches? Or is there an exception in a year when you have a launch?

So Linda the long-term economic model that we've outlined is a three-year model and it's based on a three-year CAGR. So, as you look over -- in a three-year time frame, we do expect adjusted EBITDA to outpace net sales growth, and so that you're really looking at that beginning and ending point for your measurement.

Okay. Thanks very much.

Our next question comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Hi, guys. So a couple of questions around the Soulcare business. Tarang, you sound excited about it. Can you give us some type of thought process for the ultimate size of where that business could be longer term, maybe what the best brand comps are in the marketplace just as we think about the revenue size of the brand or some type of order of magnitude? Or how you think about it relative to your existing business? And then incrementality of that brand relative to your existing business? And then just second on the spend you mentioned in the back half of the year. As we look at the spend for that brand going forward, is it more incremental to what you typically be spending at the company? Can it be handled more within the existing budget in terms of reallocation? How do you think about that longer term ahead of obviously some upfront spending in the back half of the year this year? Thanks.

Well, Dara, we are tremendously excited about Keys Soulcare, because we are creating something, we believe is completely new in the category. Lifestyle Beauty brand really aimed at nourishing your soul and so starting with content and then going into product. In terms of business size, we're building this for the long term. So we said they will have a modest sales contribution this fiscal year. But -- and we'll maybe later disclose kind of what size range it would well starting in skin care so you can usually use comps in terms of other skincare brands as a starting point. But it's even beyond skincare because this will go into multiple categories. I think one of the things that give us heart beyond our own excitement for the brand is just how excited Ulta Beauty is and we'll be partnering with them to launch this brand and the level of support they're going to put behind the brand in terms of what they really believe for the long term. And then in terms of spend, we would put the spend in the context of the overall percentage of the company. So each brand that we have between W3ll PEOPLE, Keys Soulcare and e.l.f. cosmetics really have their own spend levels that we use to support the brand. And so the overall 14% to 16% that Mandy gave is a comfortable level for us right now in terms of being able to support all three brands. And again we'll update on that as we get into the launch here.

Our next question comes from Steph Wissink with Jefferies. Please go ahead.

Mandy I have a clarification question on the system migration. It sounds like that was detrimental to your sales growth in the quarter. I'm wondering if you can help us quantify what that holdback might have been. And then Tarang for you just a question following up on Keys Soulcare, the gross margin structure being net neutral to the company was a bit below what we would see typically for a prestige skin care business? And maybe talk a little bit about the gross margin neutrality, does that include a royalty or something unique that would benchmark you differently than what we see in the broader marketplace? Thank you.

Hi, Steph. Okay. I'll take the first question and then I'll pass it to Tarang on keys Soulcare. On the system migration, we did have shipments shift out of Q2 into Q3. We have not put a dollar amount on that publicly, but I will say that it did contribute to the higher inventory levels we did have coming into the quarter. And we'll also be kind of a building block if you think about it for how our second half forecast will come together and is already implied there in the guidance.

And then maybe just building to that, the system migration issue was related to Ontario, California distribution center which is our largest distribution center. We have a third-party logistics provider that had a long-planned migration in their warehouse management, system ran into a hiccup. It's one of the reasons we shipped less and why you have some higher out of stocks right now. The good news is we're already past that issue. We're shipping at much higher rates and quickly catching up in terms of our in-stock positions with our customers. And then on your second question regarding Keys Soulcare. The product margin is actually higher than the overall e.l.f. average gross margin, but it does include to get to the gross margin you do have a royalty in the form of both cash as well as e.l.f. equity. We like that structure quite a bit because it really ties into our longer-term vision for the brand and really aligning our interest with Alicia Keys. In terms of what we're building here for the long term and that's why the overall gross margins in line with the company.

Thank you.

Our next question comes from Andrea Teixeira with JPMorgan. Please go ahead.

Hi. Thank you. And congrats on the numbers. My question is how we should be thinking the second half top line growth in particular Q4 in terms of the new distribution, I'm assuming you're still going to get some of that benefit from Walmart and also Ulta. And second on the clarification on the comment that Mandy and just now also Tarang you made on the Keys Soulcare profitability. Should we be thinking of the $5 million to $6 million marketing launch expenditure to be recurring? And then you're going to build up to that margin and to get the leverage throughout the fiscal 2021. I'm just like thinking of like things are not featured right now -- sorry fiscal '22 through '24 because you're doing bad in your long-term algorithm that your margin is going to expand more. But I'm just thinking like it will be more gradual assuming it depends -- it will depend on the top line we are accelerating. Is that a fair assumption?

Right. Okay. Yes. Andrea, let me start with your first question on the second half top line growth and the assumptions around there. So as we talked on our prepared remarks, one, do believe that there's going to continue to be volatility within the color cosmetic category, but we are confident that we will continue to gain share in the category. So I would say our second half trends will benefit from the space expansion that we've had recently in Walmart and Ulta Beauty. That was in the fall. Additionally we'll also benefit from new distribution that we're picking up in the spring with shoppers in Canada and then also additional space expansion that we will get in spring 2021 with Ulta Beauty as well. Third, we believe that e-commerce will continue to be a driving force in our net sales performance though likely moderating from the levels that we've seen earlier in this year as consumer behavior kind of starts to stabilize or shift back to the brick-and-mortar side. So I would say those things plus the modest contribution that we're expecting from Keys Soulcare are really the top line drivers that we're looking at for the second half. And then on Keys Soulcare, the $5 million to $6 million that is really related to the launch of Keys Soulcare. Too early to tell you, we haven't given fiscal '22 guidance yet and how to think about that marketing spend on a longer-term horizon. But I would say that, that $5 million to $6 million that we're talking about for now is really in preparation for the launch of the brand here in the next quarter or so.

Super and helpful. And then just to, e-commerce represented how much again, if I'm sorry if I missed during the quarter from your sales?

I don't think we've provided the percentage of e-commerce. Do we did, 13% sorry of the total net sales that we had in the quarter.

Okay. Thank you.

Our next question comes from Oliver Chen with Cowen. Please go ahead.

Thanks very much. Congrats on the expansion at Walmart and Ulta. As that happens what should we know about product changes or the products that will be incremental? And are there thoughts around mix? We're curious about skin care. As that continues to really succeed, how are you thinking about breadth versus depth in skin care, indoor mix and innovation happening there with the assortment? I would also just love your thoughts on community and Keys Soulcare. It seems like it's a core tenet of what you're doing there. And how you might contrast that against the community you've built at e.l.f.? Thank you.

Oliver. So I'll tell you first of all, in terms of our expansion one of the reasons excited about space expansion is other than target which is our longest-standing national retail account where we had about 11 feet of linear space at the end of FY '20. Really every other customer has about less than half that space. So getting more space at Walmart and Ulta Beauty were important in our journey to get the right footprint on e.l.f., and as we pick up space one of the real strengths we have is our innovation program and the new items we have across our entire line. It's one of the reasons we've been able to sustain growth in a challenged category across face eyes lips tools and skin care. In particular, the space gives us an opportunity to get more skin care items international retailers. If you take a look at our business overall, skin care is about 8% of our tracked channel sales, but almost 25% of our sales on elfcosmetics.com. And if you look at the difference a big part of that difference is the assortment, our ability to put more of our ranges international retailers and put focus against that. So we believe skincare has quite a bit of white space just based on the success that we have on elfcosmetics.com. And as we get larger footprints it gives us the opportunity to put a richer mix of skin care in addition to some of other Keys holy grail innovation. And then on the second question on Community. Community is such an important part and has been for our entire 16 years. I mean if you think about e.l.f. Cosmetics, it really was built behind this passionate community that knew about the brand and help build it up and continues to be buoyed by that. And so community is really core to our DNA and our digital routes. Key Soulcare is no different from the standpoint of starting digitally, starting with content, conversation and community. And as I mentioned earlier the response has been incredibly positive to that. And so I'd say, it's a really rich community. It will be a different community than the e.l.f. cosmetics community in many respects. Partly because, Keys Soulcare will be in the entry-level prestige area. So if unit retails between $20 and $40 for the initial range, that's quite a bit different than the average $5 average unit retail with e.l.f. and then also with primarily skin focus in the beginning going to other categories. And so, I think you'll continue to see -- and the great news is just like e.l.f. cosmetics all you have to do is go on the website keysoulcare.com and you can see the rich content and then even on the social channels. I mean, the level of consumer reaction we're getting. And how meaningful this brand is really gives us a great deal of part in terms of its future potential.

Thank you very much. Best regards.

Our next question comes from Bill Chappell with Truist Securities. Please go ahead.

Thanks. Good afternoon.

Good afternoon.

First, I guess housekeeping how much of -- how much was the kind of marketing start-up cost for Keys Soulcare in 2Q?

So, Bill in our -- there's not really marketing start-up costs. There are certain launch costs related to Keys Soulcare included in our adjusted SG&A and adjusted EBITDA numbers. You can see that called out in the footnotes in the non-GAAP schedules in our press release.

Got it. Okay. I was double check. And then second I guess Tarang, can you give us an update just kind of the health of color cosmetics is in the mass side? I mean, you said you're the only one of the five major players to grow. I'm trying to understand how much of that is category is still recovering in later stages of the pandemic. Have we recovered at all from the latest of the pandemic? Or is it just more -- your competition isn't kind of rising to the occasion?

Well, I'd say first of all, the category has definitely been impacted by the pandemic everyone has been restricted and cooped up hasn't been able to get about their normal routines and that certainly impacted the category on the whole. So while not at the bottom that it was -- to be started as the pandemic particularly through different ways of COVID, you definitely see an impact on the category. I think we've been not only forging it, but we've executed really well in terms of being able to buck that trend across everyone of the categories in which we compete. And I think it's the fundamental value equation we have of the best of be made accessible to every eye look in face. As well as the execution against the five strategic imperatives we've been talking about now for about two years. And so I think we've got the trend. We feel confident in our ability to continue to build share even in a challenged category. What I will tell you longer-term is, I'm quite bullish on the category. I think as consumer behavior returns to normal this is such a central category to consumer self-expression and importance. I believe the category will come back quite strongly. And a lot of that in terms of the timing will really depend on when people are able to get back to normal behavior. Regardless of whether the category is challenged or does better. I like our position within the category. We had strength going into the pandemic, we've executed well during the pandemic and we're building a brand portfolio that I think will make us even stronger as the category recovers.

Got it. Thank you.

Our next question comes from Jon Anderson with William Blair. Please go ahead.

Good afternoon. Thanks everybody. Just two quick ones. If you could talk a little bit about the Keys Soulcare sourcing model. The sourcing model lineup with the model you use for the rest of your business and whether there'll be any ties between the elfcosmetics.com website and the Keys Soulcare site? And then the second question is, you're now managing three brands as you move forward as opposed to one historically, are there any changes that you've made or you feel you need to make to people process systems approaches internally to manage the added complexity? Thanks.

Sure. Hey, Jon. So I'd say, first of all, on Keys Soulcare. It's one of the real basis of our strategic extensions is being able to leverage the chassis we've built with e.l.f. Beauty, particularly the investments we have in our team and infrastructure. So, the sourcing model in Keys Soulcare as it fully leverages the innovation model we have on e.l.f. as well as our overall operating platform. It gives us that great combination of cost quality and speed going forward as well as the ability to get into other categories. We supplemented that really through by the acquisition that we had on W3ll People one of the key developers of the product range is Dr. Renee Snyder, one of the core co-founders so unW3ll People, a board-certified dermatologists one of the Co-Founders the W3ll People. She's been part of our innovation team working very closely with Alicia Keys to really develop a phenomenal product range. And so it's really leveraging both those investments and capabilities we have and you'll continue to see that in terms of ties between the brands I'd say the ties really are on the back end. And our overall infrastructure and chassis we have. So, our ability to stand up the site much faster really came from our strength in digital a lot of what we're doing from a content standpoint. But from a consumer-facing standpoint, all three are distinct brands with distinct consumer segments and complementary to each other. So, you won't necessarily see a strong tie between the brands as much as our ability to leverage the company. And then in terms of managing three brands versus one, I'd say a couple of things. First and foremost, most of us come with multi-brand experience very -- the company is full of very strong backgrounds in both consumer and beauty that have managed portfolios of brands and so we definitely have that expertise within the company. But we have also brought on incremental resources. So, if I think of the additional personnel that we brought on in anticipation of Keys Soulcare, I feel really good about the balance of leveraging the core chassis and then having some dedicated resource. And some of those dedicated resources by each of the brands is how we're able to manage the consumer-facing aspects, while at the same time leveraging all the investments we've made in the company.

Thank you.

Our next question comes from Rupesh Parikh with Oppenheimer. Please go ahead.

Good afternoon and thanks for taking my questions. So, I just had a related question just related to longer term guidance. So, first on COVID, as we think about I guess fiscal year 2022 to 2024, is the assumption that will now be past the COVID headwinds? And then second in regards to the sales guidance I was just curious if there's any granularity you can provide in terms of how you guys are thinking about the growth for the e.l.f. brand versus some of the newer brands you have?

So, Rupesh I'll start with the long-term economic model and any impacts from COVID. I would say that we're just really focused on driving growth through that long-term economic model. And I think that our track record over the last seven quarters of delivering strong sales growth gives us confidence that we can continue to do that and deliver on our long-term economic model. In terms of sales guidance on e.l.f. versus the other brands, I would say that we -- I just talked about some of the things and the drivers that will impact our second half net sales which included a modest contribution from the Keys Soulcare brand. But beyond that we have not broken that down just yet really keeping the focus on beauty as a total.

Great. If I can say just with one more question. Okay. If I could speak just one more question. Just given all the second wave risks we're seeing in the U.S. right now, are you guys seeing -- I guess as you look at your dialog, are you starting to see an impact on your business related to the second wave spikes in different markets?

Well, we track that pretty closely and we certainly can see a correlation depending on restrictions in different areas in terms of both traffic to retail stores and consumer behavior. I think we feel that – we feel more confident about is our ability to execute even in the face of that. We did that through the first wave of COVID, really the second wave, maybe on a third right now depending on where you're at, and our ability to continue to drive growth in a down category. And given the drivers that we have coming both in terms of space gains, the space we already gained, space we're about to gain as well as a new brand launch. We feel good about where we stand relative to the category.

Great. Thank you. I’ll pass it on.

Our next question is a follow-up from Oliver Chen with Cowen. Please go ahead.

Hi. Thanks, again. You've made a really amazing success with TikTok. Just would love your thoughts on return on ad spend in relation to how you're analyzing the metrics there and the impressions and what that may imply for your thoughts around marketing spend, whether that be dollar or rate in relation to the success you had on TikTok? And I would also just love your take on live streaming and how that's manifesting in different aspects of your business and what you see ahead? Thank you.

Sure. So all I'd say, we have had tremendous success on TikTok but we've also had success across platforms and TikTok, specifically I think we're now between our various brand challenges up to 10 billion views, 6.5 million user-generated videos and it's really helping drive relevancy on the brand, particularly amongst Gen Z. In terms of marketing spend and how we evaluate it, we really evaluate in two different ways. One is overall ROI, where we talked last quarter getting the Nielsen marketing mix analysis done. We showed very strong returns and our spending in total. And then across various vehicles. And then the second is really kind of by what's really causing buzz and having stay top of mind, particularly among key demographics like we just talked about TikTok and Gen Z. So we really look at both those together. And then live streaming, I would say, we'll continue to have an important impact on the business going forward as other initiatives have for the consumer, so including our kind of virtual try on feature on elfcosmetics.com as well as different ways of kind of engaging consumers. And I think you'll continue to see us do more there.

Thanks a lot. Appreciate that.

Our next question comes from Mark Astrachan with Stifel.

Hey, guys. This is actually Peter on for Mark. Thanks for taking the question. Can you provide more color on where you see promotional activity can be category wise? And also, if we're seeing any sort of return to normal there? Thank you.

So I'd say on the promotional activity, we haven't seen any major spike at least on the mass side on the promotional side is some number of brands has been highly promotional in the category and we continue to see them be highly promotional. I'd say as far as e.l.f. is concerned, that's never really been our strategy. Our strategy has been to provide the best of beauty at extraordinary values every day. And we like that strategy because it allows us to kind of stay true to know who we are and what our consumers expect but also gives us a certain level stability and not having to play in all the nonsense of high low. So overall, I'd say, we haven't seen that much of a change in the category even though some players have been highly promotional. And then two, our strategy remains intact as it's winning in the marketplace.

Great. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over Chief Executive Officer, Tarang Amin, for any closing remarks.

Great. Well, thank you everyone for joining us today. I'm so grateful for our incredible team at e.l.f. Beauty. Shown tremendous talent, meeting the challenges of the pandemic and building market share. I believe our future is bright and remain confident in our long-term strategy. We hope everyone is happy and healthy this holiday season. Thank you and be well. Thanks, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.