Anne Rakunas - IR Tarang Amin - Chairman and CEO John Bailey - President and CFO.

Bill Chappell - SunTrust Steph Wissink - Piper Jaffray Jon Andersen - William Blair Oliver Chen - Cowen & Co. Andrea Teixeira - J.P. Morgan Mark Astrachan - Stifel Bonnie Herzog - Wells Fargo Securities.

Good afternoon and welcome to the e.l.f. Beauty third quarter 2016 earnings call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anne Rakunas of ICR. Ms. Rakunas, you may begin..

Thank you. Good afternoon, everyone and thank you for joining us today to discuss e.l.f. Beauty Inc.’s third quarter 2016 earnings results. A copy of today's press release is available in the Investor Relations section of e.l.f.’s website. A recording of the call will also be available for 30 days on elfcosmetics.com.

As a reminder, this call contains forward-looking statements that are based on management's beliefs and assumption, expectations, estimates and projections. These statements, including those related to the company’s fiscal year 2016 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 from 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 the press release the company issued this afternoon for a reconciliation of the differences between the non-GAAP presentation and the most directly comparable GAAP measures. With us from management today are Tarang Amin, Chairman and Chief Executive Officer and John Bailey, President and Chief Financial Officer.

It is now my pleasure to turn the call over to Tarang..

Thank you, Anne and good afternoon, everyone. Similar to our roadshow, John and I will tag team as we walk through our results. We are pleased to share a strong performance in our first call as a public company. Q3 highlights include a 11% increase in net sales and a 650 basis point expansion in gross margin versus last year.

These results demonstrate progress towards our mission to make luxurious beauty accessible for all women to play beautifully. We continue to engage some of the best consumers in beauty by delivering high quality cosmetics at an extraordinary value.

As a result, we drove sales growth even as compared to the third quarter 2015 period that included a national launch into 6,900 CVS stores. We have four key growth strategies to help realize our mission, build a great brand, lead innovation, expand brand penetration and drive world-class operation.

Here are some Q3 highlights on the progress of our strategy. Our first strategy is to build a great brand. e.l.f. is an authentic brand that young, diverse makeup enthusiasts love.

Relative to the overall cosmetics category, we're twice as developed among the millennials, overdeveloped among Hispanics and have strong appeal with makeup enthusiasts that consumers are driving in categories. Our approach engages consumers who is good in social media and digital platform. As an example, this past quarter, we launched e.l.f.

Beauty Scape, a social activation engaging 50 of our beauty influencers. Through this event, we create an experience that feature the best of e.l.f. We shared some of our latest innovation, inspired participants of make-up education and tips and enables strong connections in community building.

The program delivered a 25% increase in Instagram followers and reached a combined community of 53 million across social media platforms. Through authentic activations such as Beauty Scape, we believe we can further build awareness and deepen engagement with our consumers.

This quarter, we also launched our loyalty program, Beauty Squad and enrolled 80,000 consumers in just the first six weeks. This program provides an important platform to personalize our communications and further engage with our makeup enthusiasts.

Our vision is to build deeper relationships with our consumers by encouraging and rewarding them to continue engaging and shopping with e.l.f. As we continue to focus on building a great brand, we plan to expand this program, strengthen our CRM capabilities and deliver more fun relevant content for our consumers.

Our second strategy is to lead innovation. e.l.f. has a strong track record of leading innovation and can introduce new items from idea to online in as few as 20 weeks. In Q3, we launched 20 items on elfcosmetics.com across eyes, lip, face, tooth and skincare.

One highlight was the introduction of our beautifully precise brush collection, an example of our first to mass innovation, bringing prestige and inspired innovation first to the mass market. At price points ranging from $5 to $12, these brushes are available at a fraction of prestige prices.

Since previewing the brushes with influences at our Beauty Scape event, the collection has garnered significant social media and PR interests, delivering over 200 million impression. The initial consumer response has also been outstanding with an average online consumer rating of 4.8 out of 5 points. Our third strategy is to expand brand penetration.

e.l.f. is a true multi-channel brand with strength across leading national retailers, e-commerce and our e.l.f. stores. We’re able to offer our retail partners high sales productivity for linear foot of space, multiple units per transaction and incremental sales that help grow their categories.

We have national distribution at target Walmart, TDS and other leading retailers. Our recent win for this quarter is launching e.l.f. at [indiscernible] with initial sales being quite promising. We continued our international expansion by entering all doors in Walmart Canada.

Importantly, our growth remains quite balanced with two-thirds of our year-to-date growth with national retailers coming from existing doors and one-third coming from new doors. We continue to focus on the development of our direct business, which includes both e-e-commerce and our e.l.f. branded stores.

E-commerce was supported during the quarter by the launch of new products for first beauty influencer product collaboration and the introduction of the Beauty Squad loyalty program. We also continue to see strength, leveraging our core e-commerce understanding at retailers, including Amazon. We opened 7 e.l.f.

stores in the quarter to bring our total to 15, including our first California stores with two locations in the Los Angeles metropolitan area. We believe our stores provide a great opportunity for us to connect with our consumers in an experiential format and drive both awareness and engagement. Our fourth strategy is to drive world-class operations.

e.l.f. has a long history of leveraging its operations advantage, enabling us to source high quality cosmetics at an extraordinary value. World-class operations start with world-class people. A key management hire during the quarter, we appointed Jon Fieldman, SVP, Operations.

Jon has over 20 years of various supply chain leadership roles as leading consumer of this company. I’ve worked with Jon for over 15 years. He was my operations leader on my businesses and at Schiff Nutrition. I look forward to Jon bringing continued process discipline to expand our operations advantage.

Other key hires for the quarter include a new Vice President of Creative, most recently and several operations hires who bring further lean manufacturing and planning discipline to e.l.f. In Q3, we also welcomed Kirk Perry to the e.l.f board of directors.

Kirk has over 20 years of consumer product leadership experience at Procter & Gamble and he is currently President Google Brand Solution who is always at the epicenter of changes in consumer engagement. We look forward to Kirk providing his business and digital leadership to our board.

Along with key additions to the team, we completed the transition to our state-of-the-art distribution facility Ontario, California. This facility tripled our distribution capacity and provides strong fulfillment capability across national retailers, e-commerce in e.l.f stores.

In summary, we continue to make progress on our growth strategy and remain excited about our business as we begin the final quarter of the year. I’ll now turn it over to John to provide an update on our financial progress..

I’ll begin by reviewing the details of our third quarter results and then Tarang will provide our outlook for the full year. Before continuing, I'd like to note that we will be speaking to both GAAP and adjusted results. You can find a detailed description of adjustments to GAAP results in the earnings release that we issued this afternoon.

We believe this presentation provides investors with a better analysis of the underlying performance of our business. For the third quarter, net sales increased 11% or 5.5 million to 56.3 million. In our national retailer business, we saw growth within existing doors as a result of strong productivity increases, fueled by our innovation market.

We also grew our direct business, which includes both e-commerce and our own e.l.f branded stores. Importantly, we had a meaningful reduction in dollar of promotional activity in e-commerce with over 90% fewer price off days as compared to the same quarter last year.

Gross margin expanded by 650 basis point to 58% from 51%, driven by our suite in the mix initiative. Suite in the mix is a systematic consumer led approach to driving margin improvement in the business.

At the core of suite in the mix is our innovation process, both in terms of our flow of new items with margin profiles that are accretive to that of the overall company as well as existing items that we are able to improve from a consumer experience standpoint, while also increasing margin.

On an adjusted basis, selling and administrative expenses as a percentage of net sales were 43% compared to 33% in the third quarter of 2015. The deleverage in SG&A on an adjusted basis was primarily driven by strategic investments to support our growth.

These investments include higher operational costs related to the transition of our warehousing operation from New Jersey to California and additions to key headcount as well as higher information technology costs for infrastructure improvement. Adjusted EBITDA was 11.7 million, a decrease from 12.3 million in the third quarter of 2015.

The decrease was driven by the investments in SG&A I just mentioned as well as the benefit we saw in Q3 of 2015 from the initial shipments to 6,900 CVS stores.

Adjusted interest expense increased 1.1 million to 4.3 million largely reflecting the incremental term loan borrowings we incurred in relation to the June 2015 dividend recapitalization transaction.

During the third quarter, we completed our initial public offering and utilized a portion of the proceeds to pay down the outstanding second lien term loan. We expect to see the benefits of lower interest payments associated with this paydown beginning in the fourth quarter.

For the 3 months ended September 30, 2016, we recorded an adjusted tax benefit of 0.4 million. Also in Q3 I’ll note that we realized an income tax benefit of 1.7 million due to option exercise activity in the period, which impacted our provision and the optics around our tax rate.

This relates to our early adoption of accounting standards update number 2016-9, Improvements to Employee Share-Based Payment Accounting which companies will need to adopt in 2017.

Under this standard, the tax impact of employee option exercise, it is no longer recognized and paid in capital on the balance sheet but is now recognized directly to that tax line on the income statement. Adjusted net income was $4.5 million or $0.09 based on a pro-forma diluted share count of 50.3 million.

This compares to adjusted net income of $3.9 million or $0.08 per share based on a pro forma diluted share count of 50.3 million in the third quarter of 2015.

Capital expenditures during the quarter totaled 2.6 million compared to 4.2 million in the third quarter of 2015 and were primarily related to investments in infrastructure and the opening of seven new e.l.f. stores during the quarter.

Year to date, we've increased net sales by 22%, achieved gross margin expansion of nearly 500 basis point, and increased adjusted EBITDA by almost 11% as compared to the first nine months of 2015.

As we mentioned, our business is incredibly dynamic quarter to quarter with variability and shipment timing for new distribution, shelf resets and seasonal periods as well as timing of merchandising programs and investment spend. As such, we plan our business annually and will continue to guide on that basis.

We remain enthusiastic about the year which is reflected in our annual outlook. For the full-year 2016, we expect net sales of $227 million. Adjusted EBITDA of $50 million, adjusted net income of $15 million, adjusted pro-forma diluted EPS of $0.30 on 51.4 million pro forma diluted shares. In closing, I’d like to thank our entire e.l.f.

team for continuing to execute on our mission and growth strategy. As we look ahead, we remain excited about our business as we believe we are in the early innings of growth. We have the ability to engage some of the best consumers in the category, they love our ability to deliver high-quality cosmetics at an extraordinary value.

We continue to see momentum in our direct channels and leading national retailers as well as strong operational results. Of course the key to our success is the strength of a high performance team. This team is dedicated to the values to delight our consumer, to do the right thing, work together to win and execute with speed and quality.

The combination is quite powerful and gives me confidence in our future. I’d now like to open the call up for your questions.

Camille, is there a question?.

[Operator Instructions] Our first question comes from Bill Chappell with SunTrust..

I wanted to talk a little bit about the sales momentum as we go into the fourth quarter, was there any type of pull forward, or anything that altered that, or do you feel pretty good with your set up and where things go, that the momentum kind of continues, because certainly this was an out performance in 3Q.

I want to understand if we are lapping anything, or we are missing anything as we go into 4Q?.

Bill, we feel really good about the results that we were able to drive in the third quarter particularly against the tough comp last year. As mentioned in the opening remarks we plan on an annual basis given the movement that we can see in our business quarter to quarter.

But as you can tell from our outlook we remain enthusiastic about the business headed into Q4 and for the rest of the year..

And I know you are not going to talk specific about every retailer, but one recent add over the past two months has been Ulta.com, and didn't know if there was any change in your thought about not having any new retailers until at least early next year?.

I can tell you is we're really pleased with our start at Ulta.com. We have been in now a little bit over two months and we’re really pleased with what we’re seeing.

From a sales standpoint as well as from an overlap on core consumers, our young diverse makeup enthusiasts match up well with their core target and we love what we're seeing there as well as our continued focus in the key retailers we’re in.

We're not going to talk about new retailers until we talk kind of our forecast in the end of this year in 2017 and we’ll be able to update you better then in terms of any additional retailers..

Our next question comes from Steph Wissink with Piper Jaffray..

Steph Wissink:.

,:.

So, on Beauty Scape, we’re really excited about this program, as I mentioned it's an activation where we bring - we brought 50 of our influencers together in San Francisco for the weekend.

We’re able to share some of our latest innovations and really allow this community kind of bond as well as had it immersed in the brand including some of the things that are coming new. It was incredible what we saw come out of that event, we saw over 200 million outreach from a social media standpoint.

We also saw the influencers that attended this event were generating I think it was like 12.7 times more post than our average influencers did. We also saw a major pick up in traffic towards our site as well as again some of our innovation, John mentioned one of those in terms of our beautifully précised brushes and the off take we've seen there.

So, it is a program that builds on our tradition of engaging with our authentic - authentically with our community and we believe has led to be able to continue to drive the grant..

Steph, to your second question, just given the productivity that we're able to drive with many of our retail partners and obviously the strong innovation pipeline that we have, the case for incremental shelf-space is fairly compelling and I think as we've mentioned in the past very aligned with many of our retail partners about that journey.

Can't really comment into 2017 but we will get into that in greater detail when we talk in the fourth quarter and provide the outlook then..

Our next question is from Jon Andersen with William Blair..

Two quick ones from me, one is, on the national retailer business, I think you’ve indicated that two thirds of the year-to-date sales growth was through existing accounts, one-third through newer doors.

Is that a similar profile we should be thinking about for the fourth quarter and how much kind of variation from year to year might you expect in that figure. And I'm thinking about if you look out over kind of ’17 and ‘18. And then the second question is just on gross margin, very strong progress obviously there with 650 basis point of improvement.

Can you talk a little bit more about what drove that some of the components within the suite and the mix program and your confidence in continuing to be able to support gross margin expansion going forward? Thank you..

So Jon, yes, as you mentioned about two thirds of our growth year to date has really been driven by existing doors where we've been for some time. And as you - as we've talked about the components of that its really productivity as well as shelf space expansion that ends up being the underlying drivers within a particular account.

To answer your question on the go forward, it's one of the best parts of our story which is that we still have such untapped potential in terms of new doors, yet our story is incredibly balance in terms of how been able to grow within existing accounts as well as how we've selectively added new distribution over time.

So in any particular period I think depending on our decision to partner with a new retailer account or continue to penetrate within their chain we may see the formula move in one side or another but I think you'll continue to see that balance overall.

And then on gross margin, you touched on which is sweeten the mix initiative and really an innovation program that's been driving the significant expansion that you've seen in 2015.

Really two components to that, one which is the new innovation coming online and we continue to keep that pipeline very robust as well as areas where we've been able to go and deliver an incremental consumer benefit but also expand margin at the same time, it has been a combination on the year to date period..

Our next question is from Oliver Chen with Cowen & Co..

Recording the two-thirds of existing door growth, were you able to give us color about the comp growth versus the shelf-space growth in terms of how that broke out. Also, as we think about e.l.f.

for the long term, how are you thinking about where your overall average unit retail can grow in terms of how you will balance gross margin opportunity versus marketing spend in terms of the long-term view of building awareness of the brand and also looking at those opportunities to continue to move the brand in interesting ways as your AUR is pretty modest.

Thank you..

So, over on your first question, we're not going to decompose comp versus shelf-space expansion, what I can tell you is, it's been a combination historically. But we don't break that out going forward.

On your other question around AUR, it’s continued to be a journey for us as we’ve introduced more price points to the overall mix and continue to expand our assortment. We found that our consumer comes in at an accessible point in the range and often travels with us throughout the price spectrum.

And one of our great products is a $30 item which I think some period ago, one might question whether e.l.f. was able to sell an item at that price point. But it’s always a tension for us, it’s your point on how we think about the balance of margin and pricing.

For us it’s about offering an extraordinary value every day to our enthusiast consumer who really appreciates our value proposition and I'm very focused on making sure that we maintain that equation for her.

So we feel very good about how we've been driving that ARU progression over time and obviously as we continue to innovate there may be more opportunity there..

And just a quick follow-up on corporate strategy. How do we think about how you evolve in a multichannel way and also using Amazon and also building out your direct connection with the customer across different kinds of channels whether it be your own stores, national retailer, Amazon and others.

What’s your vision for how this unifies with respect to the brand and the consumer interface..

So our strategy from a channel standpoint is we are true multichannel brand with strength in e-commerce, our own stores and national retailers. In terms are going forward, the majority of the growth will be driven by national retailers given the whitespace that John talked about both in existing doors as well as new doors.

Having said that our direct channel plays an incredibly important role both in terms of validating our innovation, engaging with our consumers and really we believe has a significant room to grow. In terms of e-tailers, we see e-tailers as being really important within that mix those are our core customers.

Given the cleanliness of our business model, we are ambivalent whether someone buys e.l.f. cosmetics in elfcosmetics.com or whether they buy at Wal-Mart or Target or on Amazon.

It's a brand where we have very good in pricing across channels and one where we can grow and again that comes, it all comes back to us to our core consumer the makeup enthusiast who seamlessly navigates between online and offline and who wants to find a brand in the place that she is looking to shop and that why we will make it available..

Our next question is from Andrea Teixeira with J.P. Morgan..

I just want to follow up and my one question would be on SG&A.

I understand obviously that all you discussed and the great hires you have that you had through obviously make the company ready for growth, but I was wondering more like long term that if you oversee probably a much lesser pressure there and it bodes well with what Tarang has been saying about the improvement of Sweeten the Mix and improvements in average pricing and the mix improvements there.

So just help us going long term, if you feel those additional SG&A expenses obviously X option compensation would be more like its moving out going to the next few years. Thank you..

So Andrea, what I’d tell you is, what you’ve seen on our SG&A line is reflective of real investment in the brand and in the business. And so historically across headcount infrastructure and actual capability to drive and build our brands, we've been very thoughtful about making investments and will continue to make those investments.

And we’ve talked about a long-term growth algorithm of 20% and net sales growth in terms of compound annual growth from 2016 to 2019. 100 basis points of margin expansion on the gross margin side per year and a 20% compound annual growth from 2016 to 2019 on adjusted EBITDA.

And that's really reflective of our team's desire to continue to invest back in the business. Historically, it has been a combination of headcount as well as core infrastructure and marketing. I think over time, you may see more dollars deployed against a brand building opportunity just given where our unaided awareness numbers sit.

But I think this is truly a story not only of growth but investment against that growth..

[Operator Instructions] And our next question comes from Mark Astrachan with Stifel..

I wanted to ask about the gap between tracked and untracked channel growth, and see if you could perhaps help us bridge that a bit, and just sort of broadly how do you think about that contribution to the top line?.

You are talking about the different about what you see in Nielsen multi outlet versus our overall growth rates?.

Exactly, yeah..

I don't know if we're going to provide that much commentary on that other that what you can see kind of on a track basis. What I can tell you, if you take a look at the category overall at least in our kind of Nielsen multi outlet data, the category in Q3 grew about 3% color cosmetics, in the tracked basis on multi-outlet we grew about 20%.

And again the 20% is primarily well much better than the category is really due to us lapping our growth at CVS last year where we entered all 6,900 doors. So we feel really good particularly in the ratio of kind of our growth relative to the category.

For us it goes back to the makeup enthusiasts and her love of makeup regardless of what is going on macroeconomically or with the overall categories, it’s pretty consistent strong growth given the importance of this category to her and how well this brand fits her need..

Maybe thinking about it in a different way, just as follow-up, is there anything in the other channels, the stuff that we don't see through that data that would have changed materially, one way or the other? In the third quarter sort of how you think about the fourth quarter that would help the growth rate? And then, I just wanted to ask a totally separate question, I’m going to try to get both in there.

Is there any benefit from currency translation or transaction to gross margin given what the yuan is doing in terms of where your manufacturing is?.

Sure, so I’ll take this first one, in terms of things that aren't tracked in the Nielsen data, certainly our e-commerce business and our stores wouldn't be part of that and there are few [indiscernible] but I’d say the overall growth rate, I don’t thing is missing much other than looking at the tracked - track data..

And Mark do you see some modest benefit to our finished goods purchases, which are denominated in RMB from the currency movement which has been advantageous over the course of the last couple of months but if it's very little in terms of the overall impact, the primary driver of gross margin again is innovation that Sweeten the Mix initiative that I mentioned..

Our next question comes from Bonnie Herzog with Wells Fargo Securities..

I had a couple of quick questions. I guess I was hoping you could provide a few more details on your new loyalty program.

Maybe you could share some of that with us and then hoping you can drill down a little further on your brand penetration, and the targets you have made in the quarter in the US versus international?.

So I’ll take the first one Beauty Squad. This is a program we’re really excited about. It’s our loyalty program and the genesis of it is our consumers have been asking for it for quite some time, wanting a better way to kind of continue to connect with this brand that she loves.

And so what it is, a loyalty program that provides for a dollar’s purchase as well as for referring friends. And as I mentioned just in the first six weeks we had over 80,000 of our e.l.f. consumers sign up for this program.

And what makes the program really special is it goes beyond just earning and redeeming point, the Beauty Squad members are able to shop new items first, receive early access to our shopping events, receive special gifts and incentives.

And we've also found it incredibly helpful in our innovation process, our consumers have long been able to guide some of our choices in terms of innovation and we find that our Beauty Squad members are some of our most engaged in active consumers and so the feedback that they're giving to us on our new items that we preview with them has been incredible.

And then in some of the result, I think I'm particularly encouraged that so far we’re as much as 70% of our repeat revenue coming from members of this program. So it’s an incredibly important group to us and one that we're seeing in multiple results including both our overall traffic, repeat and what they represent..

And Bonnie, on the brand penetration side, as we mentioned, we saw expansion in both national retailer and the direct sides of our business, which was quite encouraging. And we also did see expansion internationally. I think the notable piece in the quarter that I mentioned in my comments was the expansions to all Walmart doors in Canada.

And from an international perspective again it's relatively small on the overall context of our business today, but we do see tremendous opportunity there, we’re obviously going to be prioritizing strategically sequence as we think about growing that side to the business over time..

And then just on the brand penetration in the US, on a sequential basis did that accelerate? I know you were dealing with a tough comp too.

I am just trying to think through how that’s kind of ramping as you’re building the business?.

It’s difficult to speak to that question, Bonnie, in this quarter just given the nature of the comp this year against the shipment to 5,900 CVS stores in the third quarter of 2015 that obviously impacts the overall growth rate but we continue to feel quite confident about where we're headed in the balance and all of our business and also the growth algorithm that I referred to earlier..

And that does conclude our question-and-answer session. I'll turn the call back over to Tarang Amin for closing remarks..

Well, thanks again for joining us. We look forward to discussing our fourth quarter results with you in 2017 and see many of you at upcoming investor conferences including the Morgan Stanley Consumer Conference on November 16. Thank you..

Thank you..

And that does conclude our call for today, we appreciate your participation..