International Flavors & Fragrances Inc (IFF) 2012 Q1 法說會逐字稿

At this time I would like to welcome everyone to the International Flavors & Fragrances' first-quarter 2012 earnings conference call. All participants will be on a listen only mode until the formal question-and-answer portion of the call. Participants will be announced by their name and company. And in order to give all participants an opportunity to ask their questions, we request a limit on one question per person.

Speaking on the call today is Doug Tough, Chairman and CEO; Nicolas Mirzayantz, President of Fragrances; Hernan Vaisman, President of Flavors; and Kevin Berryman, Executive Vice President and CFO. This call is being recorded and will be available for playback under the Investor Relations section of IFF.com.

Please keep in mind that during this call the management team will be making forward-looking statements about the Company's performance, particularly with respect to the second quarter and full year of 2012, which can be identified by such terms as expect, anticipate, believe, outlook, guidance, may, or similar terms and variations thereof.

These statements are based on how IFF sees things today and contain elements of uncertainty. Accordingly, these forward-looking statements should be evaluated with consideration given to the many risks and uncertainties inherent in IFF's business that could cause actual results and events to differ materially from what is discussed today.

For more detailed information about these risks and uncertainties please refer to the cautionary statement and risk factor disclosure contained in IFF's filings with the SEC, including IFF's annual report from Form 10-K filed with the SEC on February 28, 2012.

Please keep in mind that all numbers referenced, unless specifically stated otherwise, are on a comparable basis, which exclude items that impact comparability, to accurately reflect on how IFF manages the business. The reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures as defined in Regulation G is available under the Investor Relations section of IFF.com.

I would now like to introduce Doug Tough, Chairman and CEO. You may begin.

Thank you, operator, and good morning and good afternoon everyone. Michael DeVeau, our Head of Investor Relations, is unable to join us today as he is participating in an off-site week-long IFF leadership development program. He asked that I remind anyone who has follow-up questions to please contact him by e-mail and he will respond as soon as he gets a moment.

Now reviewing our Q1 results. Excluding a 2 percentage point impact related to foreign currency, the diversity and the strength of our category and geographic presence allowed us to continue to grow our business, as worldwide local currency sales increased 1% in the first quarter on top of the 9% growth we reported a year ago.

In Flavors local and currency sales increased 5% or 3% on a reported basis, led by double-digit performance in the emerging markets. If we exclude a 1 percentage point impact associated with an intentional strategic exit of low-margin businesses in the year-ago period, local currency sales on a like-for-like basis or as we refer to it, LFL, grew 6%.

As expected, Fragrance results were pressured by volume declines in Ingredients, which had a 300 basis point impact on total local currency Fragrance sales, as well as a challenging year-ago comparison when Fine and Beauty Care grew 14% in local currency. We were encouraged by the trends seen throughout the quarter as each month improved sequentially, a trend that has continued in the month of April.

From a profitability perspective, despite a pricing benefit of nearly 3%, overall gross margin declined 140 basis points due to a 9% increase in raw material costs. This was an improvement relative to the fourth quarter when gross margin was down 220 basis points from the previous year.

Research, selling and administrative expenses as a percentage of sales were down 10 basis points as a result of ongoing cost control and modest benefits from our restructuring. However, as we have previously indicated, adjusted operating profit and adjusted EPS declined versus the prior-year period, but results are in-line with our expectations.

After Nicolas, Hernan and Kevin finish their respective sections, I will give you some perspectives on our outlook for the full year. And with that I would like to introduce our Group President of Fragrances, Nicolas Mirzayantz.

Thank you, Doug, and good morning and good afternoon everyone. Comparing to a 7% local currency growth rate in the year-ago period, which was a record first quarter and our strongest quarterly growth in 2011, local currency sales in the first quarter declined 3%, as new business wins and pricing benefits were more than offset by volume declines on existing business.

Volume in Fine and Beauty Care remained under pressure, down 2% versus 14% growth last year, particularly in Western Europe as we compared to a 2011 period which included both new wins and volume that was stronger than historical averages. Sales in our EAME region decreased 7% on top of 22% growth last year; however, local currency sales increased 4% in North America and 5% in Latin America.

Fine and Beauty Care sales trend improved versus the fourth quarter of 2011, primarily driven by an improved win rate in Fine Fragrance.

In Functional Fragrance, local currency results were positive at 1% for the 15th consecutive quarter, as new business wins and the realization of price increases continued to drive results.

Sales were up 5% in Europe and 6% in Latin America. Within this segment Fabric Care remained a standout, growing mid-single-digits on local currency basis.

For Fragrance Ingredients we continued to focus on driving portfolio management. While we have experienced topline pressure, we have been able to maintain and protect our percent margin on the extended part of our business.

We have been making balanced pricing decisions that have resulted in some volumes being lost. These volumes have been lost where low-margin competitors are pricing to gain share in lower value-added segments of the portfolio.

Going forward, our priorities for Ingredients remain focusing on technology innovation, product portfolio management, asset optimization and operation sustainability. Given the recent trend in the business, we are also conducting a full assessment of our Ingredient activities following the economic project principle to ensure that we are maximizing our shareholder returns. I expect that this process will take several months, at which time we will provide an update.

From a geographic perspective, trends in the developed market improved, led by North America, which were 1%, driven by 4% increase in Fine and Beauty Care. Sales in Latin America were 5% in Fine and Beauty and up 6% in Functional Fragrances. While not surprising given the strong comparable I just mentioned and the economic situation in Western Europe, EAME sales decreased 5%.

From a profitability standpoint, as expected, operating profit declined 18%, or $13 million, to $56 million, as double-digit increases in raw material costs and volume declines more than offset higher prices and cost control initiatives. As a result, operating profit margin fell 280 basis points to 15.5% versus the year-ago period.

Looking ahead, we are encouraged that our level of new wins and pipeline of new business should lead to local currency sales growth in the second quarter. We continue to see sequential improvement in our Compound business.

It is worth noting, however, that Ingredients is expected to remain under pressure in Q2, similar to our Q1 performance, as a result of our six-month pricing agreements that were finalized during Q1 with the majority of our customers.

From a pricing perspective, in our Compound business we will continue to have pricing discussion with our customers to reduce the impact of higher raw material costs, a process that I expect will be ongoing until we fully recover our input cost increase.

I would like now to hand the call to Hernan Vaisman, our Group President for Flavors.

Thank you, Nicolas. Marking the 25th consecutive quarter of local currency sales growth, I am pleased to report that like-for-like local currency sales grew 6%, excluding approximately 1 percentage point associated with the strategic exit of low-margin business, on top of the 12% local currency growth we reported in the first quarter 2011.

Our performance can once again be attributed to new business wins and higher prices across all regions and all categories. In North America like-for-like growth was 5%, excluding 2 percentage points related to the exit of low-margin businesses. The best performing category was Beverage, which was up strong double-digit thanks to new wins and increased volumes of product using our sweetness tools.

Within our EAME region local currency growth was led by strong results in Africa and the Middle East. Western Europe continued to remain in positive territory on a local currency basis, led by our innovative naturals portfolio, but at a slower late than Africa and the Middle East.

In Latin America local currency growth was strongest in dairy, up double-digits, followed by high-single-digit growth in savory and beverage. Similar to last quarter, our best performing region in terms of dollars growth and percentage change continues to be Greater Asia. Excluding approximately 1 percentage point associated with the exit of low-margin business, local currency sales growth was 9%, led by a double-digit increase in confectionery and good growth across savory and beverage.

Looking at the geographic breakdown of our sales, I am very pleased with our performance in the emerging markets, which has grown double-digit on a local currency basis for the 10th consecutive quarter. This performance was driven by a double-digit local currency growth in Africa, the Middle East, Indonesia, India, as well as in [South Con] and many impacted regions in LATAM.

From an R&D perspective, we expanded our relationship with Evolva Holding, a Swiss biotech company, to implement a commercially viable biosynthetic route for the sustainable production of a key flavoring Ingredient. We expect this new agreement will leverage the progress we have made against our original agreement as we continue to build additional competitive advantages.

Turning to profit. First-quarter operating profit increased 1% or $1 million to $80 million as volume growth, higher pricing and cost discipline drove results. Operating profit margin was down 50 basis points versus the prior-year period to 22.8% due to higher raw material costs.

Looking ahead to the second quarter of 2012, while we are comparing to an 8% local currency growth rate, we are off to a solid start as new business wins are expected to continue to drive our topline performance.

With that let me turn it to Kevin.

Thank you, Hernan, and good morning and good afternoon everyone. First-quarter of 2012 reported sales totaled $711 million, a decrease of 1% from the prior-year period, as the impact of foreign exchange had a negative 2 percentage point impact on sales.

Excluding the impact of currencies, local currency sales increased 1%. The emerging markets continued to perform well, up 3% on a local currency basis on top of the very strong 12% local currency sales growth we reported in the first quarter of 2011.

Adjusted operating profit fell 8% or $11 million to $122 million,(Sic-see press release) as pricing actions and cost discipline were more than offset by increases in raw material costs.

With interest expense declining $1 million and other expenses down approximately $6 million year-over-year, the decline in adjusted operating profit was mitigated at the net income level as adjusted EPS fell 3% to an even $1, in-line with our forecast.

As expected and as communicated on previous calls, our raw material costs remained high in the first quarter of 2012. While both businesses faced a significant cost pressure, it was most pronounced in Fragrances, with strong increases in naturals, petrochemicals and feedstock Ingredients drove a double-digit increase in raw material costs.

Flavors raw material costs, which were up high-single-digits, continued to be impacted by higher year-over-year costs of items such as citrus and mint and menthol. As expected, our traction against our pricing actions continued to reduce the gross margin impact on our profitability, as our gross margin shortfall versus the year-ago period fell to 140 basis points versus the 330 and 220 basis points we saw in Q3 and Q4 of last year. This is a positive trend we will expect to continue over the course of 2012.

Given that input costs were in-line with our expectations, and based on current prices as well as our inventory levels, we expect that Q1 will represent the strongest pressure point in input costs in 2012, as we continue to expect only modest raw material cost inflation for the full-year 2012. As a result, our raw material cost comparisons are expected to continue to ease over the balance of the year, starting in the second quarter.

From an overhead cost standpoint, RSA expense as a percentage of sales decreased 10 basis points year-over-year to 22.9%, reflecting continued cost discipline. Within RSA we continued to make R&D investments to support our long-term strategic growth initiatives. Excluding the impact of foreign exchange and incentive compensation expense from both periods, our comparable investment increased year-over-year on both a dollar basis and on a percentage of sales basis.

As I mentioned, foreign exchange in the first quarter had an approximate 2 percentage point impact on the topline, but had a lesser impact on profitability as a result of our hedging activities. Looking ahead, two-thirds of our Eurodollar exposure in 2012 remains hedged at a rate near $1.40. As such, if currency rates stay where they are today, with the euro in the neighborhood of $1.30, we expect foreign exchange impacts to be a modest headwind to earnings per share for the full year 2012.

From a cash flow perspective, we continue to make improvements in core working capital. As a result of these improvements, as well as lower incentive compensation payouts and tax payments, cash flow from operations increased $88 million from the year-ago period to $53 million in the quarter.

As anticipated, capital expenditures increased in-line with our guidance, and we expect it will approximate 5% of sales for the full-year 2012. These investments will continue to be focused on supporting our strategic growth with a specific concentration in the emerging markets and the addition of new technology platforms.

With that I would like to turn the call back over to Doug for his perspective on the balance of the year.

Thanks, Kevin. Going forward we expect business trends should improve over the course of the year as we continue to capitalize on our strong emerging-market presence, a healthy research and development pipeline, and our profit improvement initiatives. In fact, overall April has proven to be a strong month for both Flavors and Fragrances, though Ingredients remain soft.

From a topline perspective, Flavors local currency should remain resilient even as we accelerate the exit of low-margin businesses. In Fragrance we expect local currency sales growth starting in Q2 to be driven by strong new wins. As Nicolas communicated, the one area where we see risk to our plan could be in Ingredient, as current trends remain soft on our external sales portfolio.

Regarding our margin structure, while we expect raw material costs will rise modestly in 2012, we are seeing pressure beginning to ease, which when combined with our pricing actions should result in gross margin expansion beginning in Q2 and continuing throughout the balance of the year. We expect that this will lead to the third consecutive year of adjusted operating profit and adjusted EPS growth, even as our incentive compensation program resets, and we continue to make incremental investments in R&D and other parts of the business that are vital to sustain long-term, profitable growth.

While we have started the year in-line with our expectations, the majority of the year is still ahead of us. Overall, we remain cautiously optimistic despite the current trends in Ingredients and the fluidity in the macroeconomic environment, particularly in Western Europe, both of which pose some risk in our achieving our long-term financial targets in 2012.

In wrapping up, we have started the year broadly in-line with where we thought we would be. Both our Flavors and Fragrances teams have executed the strategy to deliver financial results in-line with our expectations. Going forward we remain cautiously optimistic in our outlook, given the evolving macroeconomic landscape. We will proactively manage our performance, making adjustments as necessary as we continue to make progress against our strategic plan.

And with that we would be happy to take any questions you may have.

(Operator Instructions). Mark Astrachan, Stifel Nicolaus.

I guess, Doug, in terms of thinking about what you said first-quarter results, April trend, how do you think about that over the balance of the full year relative to long-term expectations? Like you had talked a bit about that in that context on the last call, so maybe if you could give us a bit of an update in terms of where we are thinking for results for the year on both a sales and earnings basis relative to those targets, that would be helpful.

Sure, Mark. Well, I don't think anything has really meaningfully changed, Mark, versus where we were before. I make that with one caveat that we are probably as perplexed as the rest of the world about what might evolve in Europe, particularly Western Europe. It remains a little bit of a cloud over our heads and our customers' heads.

But putting that part aside, Q1 came in in-line with expectations in volume and profitability and EPS. We think we're probably closer to the lower end of the sales guidance range we have given. And as I have just mentioned, we think there is some risk to the long-term financial EPS target. But relative to what our comments would have been we wouldn't be meaningfully different, absent the caveat I have just given about Western Europe.

I think the embellishment I would provide on it is the expectation that both comparables are easing for us. The overall situation now as we see it in cost of goods and raw material impacts is easing. We have -- the pipeline we have in terms of R&D wins, the customer wins are solid and the R&D pipeline remains robust. So we wouldn't be meaningfully changing anything relative to what we said a while ago.

Okay, and then just secondly, the spread between your volumes and your largest competitor's volumes have widened out to the largest amount in probably three years, at least since you and Kevin have been at the Company. I was wondering what has led to that share shift and how you think about that going forward.

I will talk to this briefly, and then I will certainly ask the two Group Presidents to chime in a little bit. I think we would look at things from a longer-term perspective. I accept very much you said about the most recent results. You are aware the industry doesn't get share information per se, so we couldn't claim victory a few years ago, nor do we understand the absolute share position right now.

But over the course of the longer-term our results aren't meaningfully different. We think we have got extremely robust comparables to go up against, which we have just reported upon. So we probably look at the longer-term, Mark, and say do we have the level of wins underway with customers? Is there a level of customer intimacy we need to have to make sure we win? And is the pipeline in R&D short- and mid-term and long-term underway to give us confidence that our current business plan is going to achieve the results we expect, and those would very much be the case.

I will let Nicolas -- Nicolas will talk first with any embellishments he might want on Fragrance comments.

Hi, Mark. As Doug has said, market share information is not readily available, so it is difficult to comment. The most recent results show a difference, but when we go back to the two-year, three-year period, we have averaged actually a 7% growth, above our long-term financial of 4% to 6%, and which a market which has grown over 3%. So that is important.

And as Doug was mentioning, we see a very, very strong pipeline of new projects, a good pipeline of new wins, and also strength in [colleague's] participation, which should be leading to a sequential improvement as we progress.

Hi, Mark, it is Herndon here for Flavors. As you evaluate the Flavors performance of the last two, three years, definitely we can that we are performing pretty well in the marketplace.

Having said that, we really -- you see, I think, with our competition in Latin America we see a kind of a softness in our business. We really addressed it early last year. We made several changes. We fine-tuned the strategy, and I can say now that we're even better positioned really to grabbing market share going forward. So overall I feel very confident the fundamentals of the business in the Flavors are there and the results are proof of it.

Ed Aaron, RBC Capital Markets.

Great, thanks for taking the question. It sounds like you are seeing -- in your value-added business you are seeing some nice sequential improvement so far this year. I am just -- I'm wondering if you are seeing any signs of strength in that business beyond what you can just attribute to easier comparisons?

You want to talk to the technology opportunities?

Yes. I think that -- I think all of the business is based on the market, but also I think that you have to have the right product portfolio. And we have been investing a lot in term of technology. And now we are getting to the market and these kind of portfolio improvement is helping us to really get businesses from -- in the market, even, sometime from the competition. So I think that this is the upside.

On the downside, I could say that we are seeing -- Doug mentioned before, Europe is under stress, so we can really see (inaudible) and volumes going down. But basically definitely the technology will give us advantage to really overcome this kind of softness in Europe.

But then maybe just to ask some follow-up clarification trends, just on your April comments, because it sounds like you saw some strength in April. And this was -- I think when you reported this quarter last year you had mentioned that trends had worsened in the month of April.

So what I was getting at is when you look at just -- I hate to be so focused on the last month or so -- but if you look at your most recent trends, is the improvement just entirely reflective of the easy comps -- the easier comps that you are up against or have you seen more of an underlying strengthening of the business as you look at things in the last couple of months?

Overall, there is a strength. I mean, Hernan has touched upon -- and I think is remarkable the comment that was made in his opening remarks that there was -- this is the 25th consecutive quarter of growth in Flavors. And it is growth off of a strong results, again, year ago. So the buoyancy that we are seeing is growth on growth. And while it is to a lesser level, the general comment looks to be the same in Fragrance Compounds. We remain concerned and made the note that the softness in Fragrance Ingredients we would expect to continue in Q2, but on the core Fragrance, Flavors in particular, it is growth on top of growth.

Okay, thanks for taking the questions.

Lauren Lieberman, Barclays Capital.

I just wanted to focus a little bit on Asia, because that is actually the one division where just like at least in the Compounds business within Fragrances it was pretty different than how we look at it. So Functional down 9, Fine down 3. So, Nicolas, can you recap a little bit about what is going on there, was there anything particular in the comps, and then how to think about that going forward? Thanks.

Yes, good question. First of all, we comp especially in the Functional you were referring from 14% in growth in 2011 and 31% in 2010, so it was a comp effect. But it was mostly three key drivers that drove the decline in Asia. First, a loss of a business last year -- so we knew about it -- which was a low-margin business. Number one.

Number two, last year we saw significant promotional activity with some customers that did not take place in 2012. And then last important to mention that we had also some inventory correction with a key customer affecting us in particular. So these were the key drivers of the challenges in Q1.

We expect a sequential improvement as we progress throughout the year. Two factors. First, increased [colleague's] participation, and also strong win rate that we know will be impacting us later on this year.

So just to follow up. So it sounded like the -- particularly at least two and three, the promotions and then the inventory correction, If I am understanding, they should have been actually been isolated to this quarter. So the only thing that continues as we go through the year is the lost business. So does (multiple speakers) turn positive as we get -- excluding Ingredients, does the Compounds business get positive when we go into the second quarter?

We have to see. We see a positive improvement. As we progress we see continued improvement. So our expectations as we progress throughout the year we should expect that sequential improvement for Compounds.

Okay, and then can you just explain, Nicolas, I'm sorry, like significant promotion with some customers, I didn't -- my misunderstanding maybe, but I didn't know there was much that IFF would do with customers that was terribly promotional, so can you just elaborate on what that would have been or how to think about it?

Yes, sorry if I was not clear enough. Some customers were very active in their promotional activity in the market. So a lot of advertising, a lot of promotion in stores during that specific quarter in the customers where we are highly represented. So we benefited from that increased activity and promotional activity last year. We did not see this year the same level of promotion on their part.

Okay, got it. Thank you. That actually may be something that continues to be headwind as we move forward if that customer is promotional for more than a quarter.

Okay, and then just maybe, Doug, for you. You guys mentioned on Ingredients review is underway. What is timing of sharing with us anything that might be more specific, both decisions made internally and then anything that is able to be shared with us?

Well, the internal work is underway, and the plan is for presentations to our Board midsummer. And with conclusions coming out of the -- and Nicolas referenced that we are going at it with the same degree of rigor akin to what we presented at the Investor Day a year ago, with economic profitability and a really a deep dive into all parts. So Board review is planned for mid, late summer and the implications -- what we can share with you and the investment community we would do so thereafter.

All right, thanks so much.

Jeff Zekauskas, JPMorgan.

Can you elaborate a little bit about what the issues are in Ingredients? Is it that your prices are too high or your normal customers are now more backwardly integrated and so you have too much capacity? From a strategic point of view, what is the malfunction in Ingredients?

Hi, Jeff, it is Nicolas. One thing which is important and that we have mentioned over the last quarter is that we have taken strategic pricing to protect margins from the rising raw material costs. So every player in the business has a different portfolio, which are impacted differently by different feedstock. And here we felt that the priority for us was to protect margin, our margin levels, which we did. But we don't see necessarily additional backward integration from some of our customers in that respect.

So this is part of the analysis that we are conducting. And as Doug say, it is a very much in-depth full review of the different parts of our portfolio, because I think it is about portfolio participation. You have a different set of competitors according to the different portfolio in which you are engaged, and therefore, we are going through that in-depth analysis.

So why do you need a strategic review at all?

Well, let me back up a little bit, embellish something. One of the points you have raised, Jeff, was is there a capacity change in the industry, which could be a driving force in cases going forward. And this that is one of the areas where we are, frankly, investigating right now. Early signs suggest there might be some legitimacy to that.

So when you have the couple of quarters or three quarters of softness that we have had in the order of double-digit, it frankly is very much on the radar screen of both management and our Board, so you can call it a strategic review or an extremely in-depth analysis to what are the root causes, what are the implications going forward? Is there a need to reshape the portfolio?

I guess I would liken it analogous to the Investor Day we had a year ago where we articulated some categories had robust profitability and would get enhanced emphasis, and some needed remediation, which is underway too. So in the context of the broad scale portfolio of Fragrance Ingredients that Nicolas just referenced, there may be some of those that we emphasize and those that we deemphasize.

So that is the -- and the other final comment would be in this very price sensitive environment we saw some customers opt for lower-priced alternatives. And as Nicolas said, we retained the margin by pricing up, which has caused the elasticity to be a little more negative than we first thought.

John Roberts, Buckingham Research.

What percent of your Fragrance capacity is used internally versus sold externally?

It is roughly -- John, this is Kevin -- it is roughly 50-50.

Okay.

And you are specifically talking the Ingredients business when you (multiple speakers)?

Correct, yes, the back integration. In the Fragrance Compound business, are they charged market price for what they use internally or do you transfer that to them at standard cost?

Well, we don't go into the details of what our transfer pricing methodology ultimately is, John, but we do have a clarity in our strategic review in terms of the evaluation of what the costs are and how they flow through to the Compound business to the extent that there are benefits there. And as you know, we only report and track our business at the consolidated Fragrance BU level.

No, I know, I am just trying to get at as you review the Ingredients business should you look at the 100% of the capacity on a market basis to review it versus maybe you might look at it more favorably if you use standard costing, for example?

We do both.

Okay. And then --.

(inaudible) help us deep dive in terms of the work that is being done.

Okay, and then you had double-digit growth in the emerging markets, but in local currency, at least, Greater Asia is only up 1%, Latin America is up only 4%. Where was the growth substantially above 10% to kind of weight average those up double-digit?

The double-digit number was for Flavors in terms of their emerging market growth. It was a lower number for the Fragrance business. Fragrance had softness across both the developed and emerging markets.

Was emerging market Fragrance roughly flat or --?

Yes, it was actually, both of them were under pressure.

And it largely was in the Ingredient side that caused that, because you -- again, Asia had a pretty steep drop in Ingredients?

Certainly that was part of it.

Okay, thank you.

Mike Sison, KeyBanc.

In terms of the raw material pressures you are seeing in Fragrances, if I were to take out Fragrance Ingredients, is the pressure less on the other two segments? And I'm just curious if most of the pressure is really just on this one little business.

Mike, good morning, it is Nicolas. No, it is actually across the board that you are seeing impacting probably some categories more than some others according to the portfolio and the mix of the Fragrances.

And one thing that you have also to take into account is that the input costs in the Ingredients are then also flowing into our Compound business. So you see the impact internally and you see it also from the portfolio of Ingredients we are buying directly on the outside.

Okay. It does sound like you're getting some pricing when you think about the 280 basis point margin decline year-over-year for Fragrances. How much of that comes back as pricing flows through the second quarter, and do you make it all up by the end of the year?

Mike, this is Kevin. Our pricing initiatives continue to gain traction in the quarter, so our effective pricing levels in Q1 are greater than what we saw in Q4. The combination of our continued hold on pricing and continued pricing actions, which then combined with a more moderate level of input cost increases over the balance of the year, will translate into our gross margin profile starting to look more positive in Q2 and then continuing to improve over the course of the year.

Okay. And one real quick one for Hernan. When you look to the second quarter and beyond, your sales growth was very good in the first quarter. It sounds like it is going to be very good in the second, third and fourth. Will your earnings growth start to mirror that type of growth and maybe improve as the year unfolds?

Yes, as was explained by Kevin and Doug, I think that we now are start seeing the positive inflection point. I think that the pricing policy that we applied, together with the departure of low-margin business, will improve our gross margin performance. So I can say that it is going to be better in the second half or in the second quarter will be better than today, the first quarter.

Okay, great, thank you.

Ed Aaron, RBC Capital Markets.

My question was answered. Thank you.

And there are no further questions at this time.

Thank you all very much for your participation. We look forward to having a further conversation in three months' time. Thank you.

Thank you for joining today's conference. You may now disconnect.