Q2 2020 Earnings Call

Greetings and welcome to the else beauty <unk> second quarter fiscal 2020 earnings call.

This time all participants are in listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator systems. During the conference. Please press star zero on your telephone Keypad. As reminder, this conference is being recorded it is now my pleasure to introduce your host well Mcmanaman VP of Investor relations in corporate communicate.

Thank you you may begin.

Good afternoon, everyone. Thank you for joining us today to discuss the second quarter fiscal 2020 earnings through.

My name is well, let me come in mind, and Vice President of Investor Relations in corporate Communications at health for the past year I was part of outside IR firm ellipse. It in September I joined open house I've been heading up IR and communications that companies like Trimble and Cisco Jasper for 20 years, and I'm thrilled to be a part of the Elle teen and mission as a reminder.

This call contains forward looking statements that are based on managements assumptions expectations estimates and projections. These statements, including those relating to the company's difficult 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 E. Filing. 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.

Yeah.

With me for management today, our drag I mean, chairman and Chief Executive Officer, and maybe feel senior Vice President and Chief Financial Officer with that I'll turn the call over to trend.

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 net sales of $68 million, an adjusted EBITDA of $15 million.

Excluding l. stores net sales were up 11% versus year ago.

We're also taking market share.

According to Nielsen and the 12 weeks ended October 5th 2019, our dollar share of the color cosmetics category was 4.7% up 70 basis points versus year ago.

Given this momentum we're again raising our fiscal year guidance, which me Andy will outline shortly.

We entered fiscal year 2020 laser focused on five strategic imperatives to drive top line in market share improvements.

They 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 that that's the beauty accessible for every I lip and face and it's our job to make sure we're communicating our unique value proposition.

We're pleased with the initial results behind our El thing Amazing campaign, which delivered 175 different versions of label adds to peak consumer interest based on their affinities.

Examples include else control, which shows a consumer filling up her shopping basket with else products to celebrate our premium quality, an extraordinary value and self respect, which underscores the fact that we're cruelty free in Vegas.

Are you to brand. This study that we commissioned found the digital AD Tech video completion rates of around 50% in AD recall around 60% both far above benchmarks.

Based on our initial success, we chose to take up or marketing plus ecommerce spent 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.

Elf was the first digitally native mass beauty brand and we've always focused on authentic engaging with our consumers.

We continue to expand our digital presence in test new platforms.

Last month, we sponsored the hashtag isotopes face challenge on to talk a video and music platform with hundreds of millions of users and a huge following among gen seat.

The L. challenge encouraged people to record their own 15 second video to an original song Islip space, which we commission from a Grammy Award winning songwriter.

The campaign resulted in a number first including most views upon launch first paid out to hold the number one trending hash tag on tick Tock 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 tick Tock brand challenge generating a staggering 3.2 billion fuse.

Our major step up in digital has resulted in increased shelf 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, elf cosmetics dot com and our retailer dot com sites continue to show strong growth.

Our third strategic imperative is providing first a mass prestige quality products at an extraordinary value.

We know how to make products people want add else speed.

Our newest totally rail products like poorly spotty primer and 16 hour Camel Concealer continued to perform well supporting our leadership in the prime or category and adding to market share gains in the concealer category.

In the fall resets, we've also seen strong performance behind or two dollar Wow, Prowl 18 piece I Shadow pallets, and our total face sponge.

We're also seeing strong success in skincare. According to Nielsen for the 12 weeks ended October 5th 2019, L. skincare sell through was up 39%.

Our recent innovations build on a foundation of health products that have seen multi year success and are still driving sales to make ehealth. The number one mass brand for primaries, eyebrow pencils and brushes.

We also continue to expand our reached a new product collaboration with key Influencers last month, we introduced a collection wasn't abella, nor a Bangladeshi American beauty Influencers, who is one point threemillion followers embrace or platform of self loved and inclusivity no matter your age size or skin color.

The launch, resulting in over 140 million impressions from leading beauty media outlets, including a lore dot com Refinerytwenty nine dot com and they'll report dot com as well as another 81 million reach through Influencers.

These results show the power of product collaborations to amplify the else brand.

Our fourth strategic imperative is to improve national retailer productivity through project Unicorn, our multi phase multiyear package and self initiative.

As of the second quarter. The first two phases of Unicorn, which include most of our retail skews our 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 three of Unicorn is expected to roll out during spring resets and is designed to bring better visual merchandising Turkey innovations.

In addition to our National retail partners. We also saw productivity gains across our other channels with double digit growth in our retailers dot com sites and on else cosmetics Dot com, where we're enhancing the Alf 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 or 22 Elf branded stores in February .

This was a difficult decision as it impacted half our employee base, well, we move boldly and with L. values due to the right thing for our employees.

I'm happy to report that we successfully exited R 22 store leases for well below what we expected at the onset of this transition.

Redeploying to $13.7 million, an annual spend that we used to invest in stores is driving greater momentum in our national retailer enough cosmetics dot com businesses.

We're also making good progress on our automation 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 terrorists.

Recall, we increased prices on approximately a third of rescues.

This pricing action was the most significant in almost 16 year history as if primarily use 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 it up to 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 of all the companies listed on U.S. exchanges Elfas want a 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 and health beauty, we're pleased with the progress executing our strategic imperatives.

These are long term initiatives that we believe we'll build shareholder value.

With that I'll turn the call over to me Andy to discuss our financial results and guidance.

Thank you to rang 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 Thirtyth 2019, as compared to the three months ended Septemberthirty 2018.

Excluding l. store net sales of $67.6 million were up 11% from 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 Pat net sales were up 9%, excluding help store and a 5% on a two year stack basis.

Gross 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, then your concessions and favorable foreign exchange rates, partially offset by care.

Note that Q2 gross margin was higher than our forecast that run rate because we had the onetime benefit a higher pricing without the full impact of tariff that the 25% level, we expect to pull it back up here at the 25% level in the back half of this year.

As a reminder, our inventory value will also increase as we bring the tariffs goods into our warehouse.

No unit inventory should remain relatively flat.

On an adjusted basis as soon as a percentage of sales was 51% up from 45% last year, primarily driven by increased investment in our marketing in digital initiative and increased depreciation expense related to customer fixture program. This is partially offset by cost savings from the closure of R 22 L. stores.

In Q2 marketing in E Commerce, and it was 14% of net sales compared to 7% in a year ago quarter.

The last call, we discussed marketing plus ecommerce then between 10 and 12% for the year well reserving the right take spend up based upon what we see on the topline.

Given the topline results, we expect to see marketing spend at 12% to 14% for fiscal 2020.

Adjusted EBITDA, a $15 million was down 1% versus $15.1 million 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 Thirtyth 2019.

Compared to a cash balance at $33.6 million last year.

The improvement was primarily driven by stronger operating results, partially offset by decrease in other liabilities related to termination payments on store leases.

And the second quarter, we repurchased approximately one and a half million dollars a stock I can start 25 million dollar share repurchase program, bringing the total amount repurchase today for two and a half million dollars.

Our investment priorities remain focused on our five strategic imperative as well as strategic extension.

Now turning to our fiscal 2020 guidance.

We expect net sales can be up 4% to 6% versus fiscal 2019, excluding the impact that they'll 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, where the share count at 52, and a half million.

We continue to expect our tax rate to come in at 28% for the year.

The raising guidance this quarter reflects the momentum were seeing in our topline sales, we're 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 dollar impact on net sales in Q3 from cycling a larger holiday program and pipeline in a third quarter last year.

Additionally, we will face a tough comp in the fourth quarter as we anniversary the pool Party primer and 16 hour Chemokines dealer launch it.

Organic influencer activity around those launches resulted in a halo effect drove strong sales in a year ago quarter.

From an adjusted EBITDA margin perspective, we're maintaining our 19% to 20% margin expectation for the year.

As I stated earlier in Q2, we have the onetime benefit of pricing without the tariff offset at the 25% level, which drove higher margin 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 question I want to reiterate that we are encouraged by the positive top line trends, we're seeing and the direction of businesses taking over the last few quarters, we remain focused on executing against our strategic imperatives.

With that operator, you may open the call to question.

Thank you I'll now be conducting a question and answer session and the interests of time. We asked we ask that you. Please limit yourself to one question and one follow up.

If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tolling will indicate your line is in the question Q you May press star to if you'd like some of your question from the care for participants you think speaker equipment, maybe necessary to pick up your hands that before pressing the star keys, one on the appraisal we pull 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 trying is for you just broadly speaking as you step back and look at what's happening in the color cosmetic space.

You get some sense of where you feel like you're providing the consumer and advantage, whether it's through product innovation price advantageous nuts, 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 Andy for you just clarification on the tariff intact can you remind us what percentage of your business.

He is coming from China, and 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 or how should we think about tariff in totality for the year in terms of the impact.

Thank you.

Hi stuff well in terms of our consumer advantage I really do you think it comes to the heart of our overall proposition of providing the best of beauty and making it accessible to every I live in face and re re establishing 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.

Category in the 12 periods ending October 5th was down about 4% on a truck basis or our ability to kind of pick up 70 basis points of share in that category is a direct reflections on the five strategic imperatives I, just kind of reviewed which really go back to the core fundamental proposition we offer consumers.

And then stuff on the on the tariffs so about 70% of our business is subject to the chair for 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 care and then there's the December 15th tariff that.

Well, becoming.

And that impacts our brushes and tools business and in terms of how we're working with our team there in China Ambinder concessions again, and you know they are always task 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 you're in past.

The last thing I would say it is a balanced approach. So we are benefiting from both FX. The cost savings initiative me, Andy talked and we're particularly pleased with the execution. We've had on pricing I recall. We are approach on pricing was we took about a third of our skews up.

In price, we did not do a peanut butter approach you really targeted where we saw we had the best consumer value and the consumer response to that's actually been quite strong me 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 Cowen and company. Please proceed with your question.

Hi, Thank you congrats on solid results regarding pricing had a nice momentum there what are your thoughts and learning from what you're doing going forward with pricing. It's also occurring in the context.

Of the market trends, you're seeing in terms of a softer color cosmetics, <unk> and the promotional environment competitors and department stores than others would love your thoughts on how that might manifest as well as phase three unicorn and what are some of the doctors you're monitoring around the phase three that we should we should also pay attention to think.

Yeah.

Hi, Oliver I would say on pricing building on my last comment the executions 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 out of some items, we really wanted to make a statement like our two dollar brow products, which are due.

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 or the value segment, we very much led pricing in our segment and we since heard a number of competitors announced 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 whether the pricing at our national retailers, where we've seen a pickup in productivity phase three really is focused on a better visual merchandising on our key innovations is I think of phase one and two which are now.

Please.

The majority of our SK use.

And have done a really great job. We believe is a further opportunity really make sure that we're highlighting these holy Grail first amass products that we uniquely can offer the consumer and that's really match what phase three is going to be above.

Okay, just a follow up holiday you've done a really good job executing on gifting in the past what are your thoughts about what's your focus on this holiday versus last year and how the the consumer and trends might be shaping up as key catalyst, though the holiday periods, a little bit different this year.

And there's a mix mix headwinds and tailwinds. Thanks.

Sure. So holidays always an important program for us, let's say, especially with target, which is our longest standing customer who has always done that a really nice job on their holiday program.

As me Andy mentioned this year, we do have a smaller holiday program planned I think you know as as we looked across a hub of various customers really our level of holidays, probably the best small is easier, but I'm, especially excited by overall presentation and offering in fact, if you go in L. cosmetics Dot com.

Right now you will see our holiday gift guide as well as our kind of as core assortment I think it's the best assortment. We've had in 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 in bringing greater awareness to us.

Thank you best regards.

Thank you. Our next question comes from the line of Andrea Teixeira with JP Morgan. Please proceed with your question.

Hi, good afternoon, one Ah. Thanks, So I was hoping to if it's acquired five new guidance embeds more doors or more displays and before or just higher velocity.

And on the terrorists came back because it's fair to say the because you took pricing in July and obviously you are mitigating asked around getting meant is that mitigating with cost saves and and also with the would that would the facts a work in your favor is it fair that all things equal you're probably going to have a margin expansion.

And into the next few quarters since you have the full impact on the tariffs and also because of your the timing of your inventory.

Okay, Yeah, I'll take those questions Andrea So I 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 at coming out of the first half of the year a balanced with the with the other items that I called out I in my prepared remarks on the tariff side. So we.

Are we are mitigating the tariff impact, but I will say that in Q2, we saw a onetime benefit is how I would characterize it from pricing as that inventory starts to roll into your point, we will start to see.

Margins, a road and so I wouldn't I'd 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 it thank you.

Uh huh.

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

Hi team, it's Eric Johnson on today's for Erinn Murphy, Thanks for taking the questions for US sourced I was curious if you could update where you are on the beauty squad it into over a million members last quarter and I know you've added some personalization elements and other improvements are just curious what you guys have learned.

For the last 90 days or so.

So 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 you know as I mentioned some of our key initiatives and machine learning and personalization include kind of dynamic product recommendations customize messaging across our various platforms, including email and tax and then optimize media placements on the beauty squad loyalty program and that's benefit.

During the brand overall in on the beauty squad loyalty program.

It's also benefiting has his receipt scanning so I mean, we remain bullish on beauty squad to really be able to drive the Brandon and helped propel else cosmetics dot com, which is seeing even stronger growth than overall national retailer business.

Great. Thank you that's really helpful. And then on the marketing mix, it's been encouraging to see that upsized here and the guidance parameters for that raise what what channels.

Typically seeing that the best return on that incremental spend or is there any one two or three.

Places you'd point us to too.

Sure.

Sure. So on 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, Els cosmetics dot com and retailer Dot coms and so we feel great about the growth given how broad skilled growth is across all.

Channels.

Certainly our digital channels given much of the spend is digitally oriented are growing even faster that includes both el cosmetics dot com as well as a retailer dot coms, but this great growth across.

Across each of them.

Okay.

That's correct.

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

Thanks, Good afternoon.

Good afternoon, Bill can you just I guess.

Trying to understand how much of the impact of both pricing and tariffs were in the quarter and with the thought that.

I assume Fracing went through September one 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 out of your probably at about a third of the impact on both pricing and tear ups and you'll get the full impact this quarter.

Yes, so I think the right way to think about that builds when the when we talk about the tariff 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, well 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 the 25% level on the pricing side, So I price.

Things are implemented in late July so there is nearly a full quarters worth a pricing included 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. It key retailers are that you expect indoor 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 timing. So just kinda understanding how that works for the spring resets.

Sure So our uh-huh incremental space, we usually don't comment on until after the it started to be implemented so for this year the only space assumptions that we've previously disclosed our we did pick up additional space in a subset of Ulta doors, we did pick up distribution at Walgreens in boots, and then as part of.

Unicorn, we have a I think much better merchandising is 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 its base expansion for this year and so we'll continue to build on that momentum as we enter this spring we sense next year and continue to partner with Cherokee.

The 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 a withheld in terms of new items that clearly has been one of the big drivers of our success. So if I think its parlous party primer 16, our 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 oh helped us.

Got it kind of that space in that efficiency by which we are confident so we can get a number of those new items into the screen resets and as part of phase to be 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, what D.A. Davidson. Please proceed with your question.

Hi, I'm I was curious if you could just comment on the.

These two of the project quarter, which I believe has to do with your brushes.

And also related to that and examining some of the the I IRI data it does look like.

Some of the bigger volume declines were in the area, perhaps of brushes and accessories until things like that or 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.

Sure 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 in insight we had a single brushes, we're facing greater headwind since I would say, whereas the consumers migrating to which is brush kids as well as bunges answer.

What phase two of Unicorn allowed us to do is actually fit in a few more of our brush kids, where we can have incredible brushes at this extraordinary value every day as well as our total face bunch, which is picking up quite a bit a share in the sponge category, which happens to be.

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 some phase two.

And then on the on the pricing question, there Linda so brushes and as you probably can see through the data that that you are 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 taken this balanced approach to make sure that we.

Understand how each item is impacted by pricing I bet you Tracepoint, we were 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 it's sort of housekeeping question for me Andy. So curious if you haven't updated gross margin expectation for for the four year.

So I would say for the back half of the year Ah you have what the front half actualized that so for the back half of the Euro I would continue to use the 60% margin that I have quoted all year long that it's 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 not so I was essentially unchanged from your prior forecast right Yep, Okay, Okay, and a question for dry 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 retailer interest in this in your skin care offering.

Yeah, we're really pleased with skin care as a reminder, we entered skin care about three years ago relative to the almost 16 year history, we haven't color cosmetics, yet the same model holes in skincare, where we can bring the best a skin care and make accessible to all our consumers. So what's driving skincare. This year really is a country.

When you Asian or the innovation, we have on skincare, our Hello, hydration skincare cream has done extremely well as has the rest of kind of the line up and that's what you're seeing in what I quoted which is the trax data in Nielsen with skin care for the quarter being up 39%. In addition to the tracked channel data and.

Our target is a huge driver of skin care for us.

You also have non tracked skincare, where I'm not going to give the numbers, but also did take skincare full chain. This year. So these are second year of well to they expanded color cosmetics in all doors last year, they've now expanded skin care and 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 Jon Andersen with William Blair. Please proceed with your question.

Good afternoon, everybody. Thanks for the question.

Good afternoon, Trey try you mentioned.

The national in 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 your international business and.

Opportunities for additional distribution expansion.

[noise], absolutely John I would say our international business has similar trends to the rest of our business in terms of the breadth of hubs the growth that we're seeing international's no different in particular I would point out the UK, which has been are probably biggest focus.

Last year as I mentioned, we had done full chain at superdrug as good business at Superdrug. This year boots is starting to expand out the brand in both customers were seeing very strong growth. In addition to our El cosmetic site in the UK. So it's a good indication of our strategy on international which is it's not a big Bang stride.

As you never can you hear us talk about entering 30 countries at the same time, it's really the same disciplined roll out that we had kind of in the U.S. When we went from one customer really make sure. We had a good foundation there and then went to another.

Hey, the same things Chew 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 ecommerce effort as well. So look forward to continue to provide updates, but it will be this disciplined rollout that will use internationally and part of it is.

Such a big opportunity.

Remaining in the U.S. with the white space, we have here with spacing customers.

That's helpful.

Just pivot pivoting back to skin care for a minute could you describe your kind of HCV or distribution skincare relative to your your distribution domestically and in a color cosmetics and just to kind of certain get us into the opportunity. There and then are you happy with how your skin care products are being merchandised retail or they can.

Oh located with your your color cosmetics or are they in different styles and is there opportunity for enhancement there.

Yes, we have major white space when it comes just 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 see the two primary customers. We have from a national retailer standpoint. In addition to help cosmetics dot com, which could find our entire skincare range on a really target.

Which really led skincare.

With us and Ulta beauty and at target, where we do have larger so shelf sets skincare is co located with our overall cosmetic session. We prefer that type of location where are you a consumer who is looking for Alf go across the entire regimen really tying into the inside of you need good skin.

Have did make a coverage.

And target really does lead our skin care business, given that that co location Ulta beauty decided to put skincare in a separate area actually in their skin care said, we originally I don't think were crazy about the idea, but they tested it it did so well that we decided to take it full chain. So we have examples of both areas are.

Reference I think would be to locate and if we have enough space within our means that and you'll see us continue to expand the distribution on skincare, given how well it's done at both target and also.

Excellent that 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 anything to consider in terms of that changing kind of your margin.

The margin profile 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 ecommerce 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 or that for.

On the 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 need plans for that plant well before tariffs you really.

Well as if we're going to automate certain aspects of operation think of liquid fill in a bottle. It made sense to put that automation here in United States in the our distribution center.

Both from a speed advantage as well as costs 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 in the majority of our manufacturing will continue to be in China, where we have a major advantage.

Page 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 asked question with Stifel. Please proceed with your question.

Thanks, and good afternoon, everyone. I guess, one just follow up on on the last line of questioning given the strength of the business at this point, maybe some sort of thoughts on on cash use beyond the facility you're talking about capex doesn't seem to be that elevated so you're going to fairly good position at this point leverage wise.

So maybe talk a bit about.

What what you can do there and then more broadly just innovation you touched on it before it's been a huge driver of growth in the business I guess I'm curious given how successful it 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 to lap that meaning without giving us details of whats coming you know what do you think about in terms of opportunities on a go forward basis.

Yeah. So I'll take the first one mark on on a cash use so we really feel great about our cash position right. Now we are able to find our strategic imperatives and we've talked about.

Potentially pursuing strategic extensions overtime. So I think when you are thinking about our cash use those would be the areas that we were focused 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 the strategic objectives.

And then on your question I innovation that that has been a critical driver of our business for 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 and stepping up our marketing activations.

Then 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 as you know we still innovate with products that consumers want at El speed. The biggest pivot, though was really making sure. We're shining a light on those innovations that the consumers, particularly interested in that was very much the case with wireless.

The primary on camera 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 constraint on both those items as we continue to activate as customers get behind US 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.

We're excited about the pipeline we have come in for it so probably the biggest opportunity I'd say on innovation is beyond our proven capability is bringing the best of beauty and making accessible for every I live in phase.

It's continuing to amplify 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. I'm in for any closing remarks.

Great well. Thank you everyone for joining us over the next month or so a numbers of our members of our team are gonna be investing.

Tending investor events in San Francisco, New York in 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.