Ladies and gentlemen, welcome to the LafargeHolcim Q1 2020 Trading Update conference call. I am Alessandro, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Jan Jenisch, CEO. Please go ahead.
Yes. Good morning, everyone, welcome to our Q1 trading update. Thank you for joining. I know it's a busy day with a lot of companies with results today. Also we have very special times with the COVID-19 crisis. I'm happy to start today to give you an overview of the key developments, and then we will have more details from Géraldine, our CFO, on the results overall and especially then for the regions and the countries. After the outlook for the year, we have then time to talk and answer your questions. I think under the circumstances, we had a very resilient first quarter results. If you recall, we have a significant operation in China, so we were already impacted by COVID-19 from January onwards.
We had a very good start of the year in all other regions, and we were well ahead of last year until mid-March, even considering the negative impact we had to balance off from China. We have more countries being locked down or had some disruptions in the construction activity, and therefore we had a negative development in the second half of March. Overall, I think we are ahead of expectations. We have a small sales decline for the quarter of -3.3% and an operating profit decline of 2.6%. I would say solid results for now. I'm very happy that we have reacted very fast to the crisis. First, regarding the health for our employees, but also for our partners and for the community. We had very strong measures in place to keep our people healthy and safe. That has worked extremely well.
We only have a few COVID-19 cases within our employees, far lower than any statistics you see from the country. I'm very happy that we have this under control as good as it gets. From a business side, we also restarted our very strong actions to preserve our cash already six weeks ago. This is a special crisis with a tsunami type of impact. The impact comes from one day to another and you have to then react accordingly and cash flow is king, and we have now a strong program in place to not only reduce the cash as a cost, but especially to reduce the cash out. That looks very positive.
We believe we are in a very strong position to weather the crisis from our balance sheet, our liquidity we have in hand, but also from our ability of cash conversion and cash preservation. I think with this Géraldine, if you give us the highlights from the results and the regions.
Yes. Thank you, Jan. We were going to start with our Q1 2020 volumes development. In cement, we have recorded a global volume decline of -5.2% like-for-like. Europe recorded cement volume decline of -2.3%. Lockdown measures implemented starting mid-March negatively impacted some countries, primarily France and Spain, while Germany and Switzerland remained resilient. In North America, we had strong cement volume growth of 8%, driven by U.S. c ement and Canada East. APAC was significantly impacted by the outbreak, which triggered volumes decline in our Chinese operations and in India, with lockdown measures starting last week of March. Philippines were also down following the shutdown of our main plant in Luzon mid-March. Overall, the region was down by -12.3%. In Latin America, strong growth of Mexico has been more than offset by the lockdown measures in Ecuador, Argentina, and São Paulo area in Brazil.
This resulted in a decline by 5.9% in the region. In Middle East Africa, cement volumes declined by 4.8% as most markets contracted with the exception of Nigeria and Algeria. Our aggregates volumes were slightly increasing at +0.5% like-for-like, mainly driven by strong results in North America. Ready-mix volumes declined by 8.5%, like-for-like, impacted by COVID-19 lockdowns in many markets. If we now look at our net sales for the quarter. Our net sales stood at CHF 5.3 billion. On a like-for-like basis, sales reduced by -3.3%, driven by the volume decline, and that we just commented. That was partly offset by price increase. The negative scope effect results from the divestment of Indonesia and Malaysia that we closed in H1 2019. Forex, as you can see, has a negative impact of -5.1%.
This effect comes from several currencies which depreciated compared to Swiss francs, primarily Euro, Indian rupee, Argentinian Peso, Australian dollar, and US dollar. If we now look at our profitability for the quarter, our Recurring EBIT is down by CHF 43 million in total. The negative Forex, mainly driven by Argentinian Peso and Indian rupee, explains more than half of this decrease. Like-for-like decline has been limited to CHF 6 million or -2.6%. The negative volume effect and the decline in the results coming from our JV, especially Huaxin, have been largely offset by positive price over cost, which stems from price increase, energy savings, and continuous reduction of SG&A. If we now start with North America. Our operations delivered excellent growth in the first quarter. Positive trends in the U.S. market continued and were further supported by mild weather conditions. Our volumes grew in all business segments.
As a result, net sales were up 10% like-for-like, and Recurring EBIT was up 31.5% like-for-like. Solid prices in all business segments and strong operational performance resulted in significant over proportional improvement of Recurring EBIT over net sales. The region has almost not been affected by COVID-19 in the quarter. Construction has been deemed as essential in large majority of markets, and our customer backlog remains strong without project cancellations. Latin America. There was a resilient performance delivered by Latin America, and this despite the outbreak of COVID-19 as of mid-March in most countries. Net sales declined by -0.5% like-for-like. Recurring EBIT was down -2.7% like-for-like. We experienced positive volume growth in Mexico on the back of better cement demand and new infrastructure projects allocated to our local business.
While Mexico was not so much impacted by COVID-19 in Q1, the virus outbreak started to affect our business in Brazil, Ecuador, Argentina, and Colombia in the second half of March. Strict lockdown measures were implemented in the majority of those countries, forcing construction sites to shut down. Let's now move on to Europe. In Europe, we had a very good start of the year, which was supported again by favorable weather conditions and continuing demand growth in Eastern Europe. Net sales declined by -3.9% like-for-like, and recurring EBIT was up 9.3%. As of mid-March, our operations in Europe were impacted by some shutdowns implemented in Western European countries such as France, U.K., and Spain. As a result, our volume significantly dropped in those countries in the last two weeks of March. While lockdowns have been implemented in 22 countries, construction has been considered essential in most of our markets.
For Middle East Africa, the region here delivered good results in the quarter, with net sales down 7.2% like-for-like, but recurring EBIT up 3.3% like-for-like. This over proportional increase of the recurring EBIT reflects the tremendous work delivered by our local teams to turn around the businesses, notably in Nigeria, Algeria, and Iraq. Impact of COVID-19, progressing more rapidly in the second half of March, has not been uniform across the region. While strict lockdown measures have been implemented in South Africa and Lebanon, other countries such as Egypt or Nigeria, have been less disrupted in the first quarter. Let's now move on to our Asia-Pac performance, which has been largely impacted by the outbreak of COVID-19 in China. Here, our net sales were down 9.2% like-for-like, and our recurring EBIT was down 20.7% like-for-like. China reported the largest decline in profitability due to COVID-19.
Our JV, Huaxin, with a large exposure to Hubei Province, contributed CHF 21 million in Q1 2020 for EBIT, compared to CHF 62 million in Q1 2019. However, China began recovering towards the end of the quarter as different provinces progressively resumed activity. Today, we are back to normalized production levels in most of the provinces where we operate. In Hubei Province, plants are operating above 90% of normal production levels. While China was ending the quarter with encouraging signs of recovery, strict government restrictions in India and the Philippines started to affect the demand. Even though not impacted by the COVID-19, the Australian market continued to slow down. India, impacted only in the last week of March, recorded a strong Recurring EBIT and a strong margin progression in the quarter, supported by cost savings initiatives and favorable market environment.
Well, after this business review, and this is a slide number 11, we felt that it was important in the current environment to touch on the strength of our balance sheet and liquidity position. We are a resilient business, which has demonstrated its ability to generate cash. We have around CHF 8 billion of liquidity as of March 31st, which is comprised, on the one hand of cash and deposits, and on the other hand of committed facilities. These committed lines are currently undrawn and have no restrictions attached. We have reached an attractive level of financial strength with a debt to EBITDA ratio of 1.5x at the end of 2019. Despite the current background, our two rating agencies, S&P and Moody's, have recently confirmed our investment grade rating at respectively BB B and Baa2, with a stable outlook.
The attractiveness of our company has allowed us to successfully continue our refinancing transactions. We have issued two bonds amounting to more than CHF 700 million at attractive interest rates and maturities just recently. We believe our strong balance sheet is a significant asset to weather the crisis. Now, moving to our action plan: health, cost, and cash. This slide, as you can see, is a summary of our top priorities. There are three pillars. The first one is ensuring that all our employees can work safely. In parallel, we care about protecting the long-term relationship with our partners and with the communities in which we operate. For this objective, we have mobilized as early as January our business resilience teams at group and country levels. They put in place their expertise in all areas to provide monitoring on the readiness of our country organizations.
The second pillar is to partly mitigate the consequences of the outbreak on our volumes by adapting our fixed cost to the production level. We are committed to achieve a minimum of CHF 300 million fixed cost savings. On top of this, we are executing all necessary actions to lower variable production cost as much as possible. Finally, cash protection measures are key in our plan. We are keeping a constant focus on cash management in order to safely navigate through these uncertain times and to maintain our level of financial strength. In particular, we apply a strict discipline in our resource allocation to make sure we invest in the projects which will support the resilience of the business. As a consequence for 2020, we will reduce our CapEx spending to a maximum of CHF 1 billion.
Similarly, net working capital management is at the heart of the cash protection measures. With this, I hand over to Jan.
Thank you, Géraldine. I think what is important in this tsunami type of crisis is to focus on cash liquidity, a strong balance sheet, and fast actions. I think you saw from our actions in the last couple of weeks, we are well prepared to weather the crisis. We have a very strong action plan, health, cost, and cash in place. With a stronger focus on cash than on cost. We don't want to start any restructuring program right now because we need to limit the cash now for this quarter and not have restructuring cost, as we see rather a good recovery based on the experience we made in China and also what we see in a couple other markets, that there will be quite a strong rebound after this virus curve is flattened. You see, we are well prepared.
We have a clear action plan, how to reduce the fixed cost, how to reduce the CapEx, how to reduce the net working capital. I think we established a very good new strength of cash conversion, which will also help us now in the crisis to be cash flow positive, even with a decline in volumes. Our balance sheet, I think, has never been stronger. Our debt ratio is at 1.5x at the end of 2019. I think Géraldine has piled up a lot of liquidity here with over CHF 8 billion as of today. We are well prepared here to weather the crisis and come out of the crisis stronger than before. Before we go to the Q&A, on the market outlook, I'm positive what we see in China now with the rebound in April. We'll probably be around last year's level already back in quarter two.
I think that's a little bit much better than we expected and gives us this encouraging for other markets. When I look at the other markets, we don't see any cancellation of projects. They are continued to run, even so if they are interrupted or something. We expect to be the projects and the construction sites all be back in operation after the government decide to do so. We don't see a cancellation in projects, so we believe that we're going to see a positive second half of the year. We don't know yet what's going to happen with the global economy, but we see also here very encouraging signs from the governments, like in the U.S., signing big bills and big budgets for infrastructure and to support construction. I think with this, I'm happy to start the Q&A. Swetlana, can I hand over to you?
Yes. Thank you very much, Jan. Right now we start with our Q&A session. I would ask every analyst to limit maximum to two questions. Thank you very much.
We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their touch tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. In the interest of time, please limit yourself to two questions. Anyone who has a question may press star and 1 at this time. The first question comes from Elodie Rall from JPMorgan. Please go ahead.
Hi. Good morning, Jan and Géraldine. Thanks for the presentation. Glad to hear that you're well. If I'm limited to two questions, maybe I'll start with one on the U.S. Can you give us a bit of color about the current trading there in the U.S.? How much deterioration you've seen in April versus March, and in which states? How much are you operating at the moment versus a normalized basis? In term of pricing, we've seen some peers talking about delaying price increases in the U.S. that were due in April. Is it also where you're seeing and what your outlook on price is? That's my first question. Second, on your capital allocation, how do you see this crisis impacting your strategy?
You talked about targeting one deal a month at the last results presentation across the mature markets in aggregates and ready mix. Do you see more opportunities at this moment given this crisis? How is this impacting your M&A strategy? Indeed, as well, how is that impacting your divestment strategy as well? Thank you.
Yeah. Good morning, Elodie. Thank you for your questions. I think, on the U.S., we have quite strong demand in the markets. All the negative news you have from lockdowns or certain things in certain states, even in March, we had positive volumes compared to last year. You see for the full quarter, we had a very good quarter in the U.S. or in the North American market. Now going forward, we have full order books in North America. We see certain, wouldn't even say delays at the moment.
We see certain disruptions like in Boston or other parts, but overall, we believe we're going to have a good year in North America, and let us see how on the health side, I'm not really qualified to comment if we have reached the peak or not in the U.S. and in Canada, but it looks for me rather positive. From a business perspective, we have very strong demand and good order books also going forward. The second question was regarding.
bolt-ons.
The bolt-ons. Of course, we believe we are maybe in our sector, we are the strongest from the balance sheet, from the liquidity, but also I think from the speed we are executing now our cash focus program. I think we will be in a good position in the second half of the year or ongoing, maybe to benefit from some good M&A. Just one small remark here. I think we need to wait for the visibility, which probably we have in June, on how these markets play out, in order to be ready here to make something good.
Okay, thanks. Just in the U.S. to come back, what would you say the activity level is at the moment versus your normalized level?
We are today in the last day of April. I don't want to comment today on any percentage numbers because it would not be serious. I'm positive for North America, but you don't know what's happening next week. We have a situation, the markets change every day. I think, to be fair, at the moment, they rather change to the positive. We rather have a softening of lockdowns and basically construction sites everywhere go back to normal business. I have nothing negative to say. I'm positive for North America.
Okay, my second question was also on divestment. Can you confirm the Philippines, for example, is going to close? does this reflect.
We are behind the final stage. I think there was a bit of slowdown due to the COVID-19 situation. The Philippines has one of the strongest lockdowns you see globally. They basically locked down the country, and also the government agencies were affected, so we expect a decision there in the next few weeks.
Thanks very much.
The next question comes from Yassine Touahri from On Field Investment Research. Please go ahead.
Yes. My first question would be on the price over cost benefit that you had in the first quarter. Could you give a little bit more color on this? Which part was related to lower energy costs? It would be great if you can quantify. Which part was related to your cost savings measures? My second question is on oil price. Oil price has never been so low. What does it mean for your business in 2020? First, in terms of potential benefits from a cost perspective, and second, what risks do you see for regions which are depending on oil, such as Ecuador, Texas, Algeria, Nigeria?
Let me answer the second question, and then Géraldine gives us a bit more detail on the price over cost. I think when we look at the oil price, I think in our business, we always have to react to the oil price, if it's up or if it's down. At the moment, we have quite a beneficial situation with lower energy costs, quite significantly. I prefer this. Of course, we can talk now about Ecuador or Nigeria and what lower oil price, what effect that might have on the country, but I don't like to go too much in speculation. You can also have a situation that the government goes more into infrastructure or into construction if oil industry is not running as profitable as it could be. But the view of the company is we feel very comfortable with the oil price trend.
Yes. If I can complete on your first question. Effectively, you can see a price over cost of CHF 136 million. That is primarily driven by price for CHF 60 million. You have energy that is also here helping with around CHF 45 million. The rest is SG&A savings.
Thank you very much.
What I like about this price over cost is that it doesn't rely on one thing. We have a positive cost effect, positive energy, and positive pricing, and this is how we like to run the business. It was a very good start to the year.
The next question comes from Arnaud Lehmann from Bank of America. Please go ahead.
Thank you very much. Good morning, Jan. Good morning, Géraldine. My first question is regarding the pricing outlook. We would expect a significant volume decline into Q2, depending on the countries. Would you expect pricing to be resilient in this environment? In particular, historically, cement prices can be more volatile than aggregate prices. Would you see specifically for cement prices downside risk in the coming months also with lower energy costs? That's my first question. My second question is regarding your reporting currency, the Swiss francs. Like in previous crisis, including in 2008 and 2009, Swiss francs have gone up a lot relative to the euro, but also relative to emerging currencies. In the medium term, would you consider changing your reporting currency? We've seen one of your sector peers moving to the US dollar. Is it something that you would consider as well? Thank you.
Yeah. Thank you, Arnaud. I think regarding the pricing, this is always our top priority, and we also make it clear now that in our countries, we will not produce into the warehouse, into the silos. We have a very strict instruction to stay or be lean on net working capital, especially on inventories, because we don't need to have any pricing effect in the market. We are positive on the pricing. You have seen we had a positive pricing in Q1, and we expect to continue with that pricing throughout the year.
On the reporting currency, it's not on the agenda. You're right, that in crisis time, Swiss franc is often considered as a safe haven currency, but that's not the priority today.
Thank you very much.
The next question comes from Gregor Kuglitsch from UBS. Please go ahead.
Hi. Good morning. I've got two follow-up questions. Firstly, on price over cost. You had that relatively substantial positive spread in the first quarter. Could you just give us a bit of a picture, what you see right now? I appreciate pricing is maybe a bit difficult to predict, but perhaps on the energy cost side and the SG&A cost-saving side, what do you expect for the next few quarters? Perhaps at least directionally, if we can think about whether some of that can be extrapolated or not. Secondly, back to the capital allocation side. Do you think the current situation to the next six to 12 months gives you an opportunity to buy perhaps something larger, in the downstream, which obviously you've been trying to get into, but so far you haven't really done anything material? I appreciate you were close to something.
Do you think it's not the right time to do something larger considering the wider risk? Thank you.
Thank you, Gregor. I think on your last question, it's clear that we will be fully financially disciplined, and we talked about it in the past, for what multiples we do the bolt-on acquisitions. There were some rumors in the market. We look at a bigger target last year, but also even so we had a big interest. We kept fully financially disciplined to that maybe bigger opportunity, which was around last year. This is what you can expect from us. We will be very not driven by big desires and passion. We will do this with the right financial smartness. This is what you also can expect from us. Of course, we are happy to see that we might be in a position in the second half of the year in a better position than many others to do deals.
We will do that only if it's really value-creating. Secondly, I'd just like to remind that we have to get the visibility for the second half of the year, which I think will come as soon as in June, where we really have a good feeling how the COVID-19 curves in all our key markets. I think it looks good for the moment, but nevertheless, before we do any deals, I think we need to have that confirmation. Thank you.
On your first question, Gregor, I think on the price over cost for the year, as Jan said, we are confident on the price and on the pricing on the energy. It will constitute a tailwind, even though we don't forecast anything in terms of for what the energy price is going to be. For SG&A, yes, you can project these savings for the rest of the year, I confirm.
Thank you very much.
The next question comes from Jean-Christophe Lefèvre-Moulenq with CIC Market Solutions. Please go ahead.
Good morning. I have two question from my side. The first one, the slag supply. As you know, there are some capacity closures in Germany and in France, in Dunkerque, in Fos, Falconeta, and probably in Bremen. How will you manage your slag supply? Will you find alternative sources maybe in Japan or in Turkey, as it could be a critical situation for cement makers? Second issue, apart from Italy, have you mothballed some cement capacities in France and in Belgium? And if yes, in which plant? Many thanks.
Oh, yeah. Thank you for your question. The last one is the cement capacity in Belgium and France. You want to know what plants are closed, was that the question?
Yes. That's the question.
Okay. Super. Yeah, let me start. I think your question around the slag, which is a very exciting mineral we like to blend our cement with, same as the fly ash, but also same as other minerals. I think the market turns very positive for us. Even so there might be some steel plants which are closed or something. We see a positive market trend for us at the moment in all our key markets, which is good. Besides that, we also have now introduced the latest cements, which rather use minerals Rock minerals to mix our cement with. This is, I would say something positive, which will also here in the crisis be rather positive for us going forward. On the capacity thing is, I don't want to give you the precise data because it's only the data of today.
We have a situation, for example, in India, where we had a super lockdown of the country ordered by the government, and then all our plants were closed. Now at the moment, we are opening up 70% of our plants already again this week, based on the government decision to open up rural areas first. It's very difficult to try to make any conclusion on the plant status at the moment. As you have asked, regarding Italy, France, and Belgium, these are the three markets together with Spain, which are maybe quite hard hit by the lockdown procedures of the government. We have a situation that a lot of construction sites were stopped, and then of course, we immediately stop our cement production. Not like in the past. You look at past crisis, sometimes, these cement plant managers, they like to operate the plant.
They make some artificial calculation. Oh, it's good for the cost, but it's the opposite, horrible for the cash and horrible for the inventory net working capital. We avoid this mistake this time, and we are sitting on rather slim inventories, and therefore we are closing down the kiln as soon as the market has a disruption. Having said that, in Italy, we only have one plant in Italy, in the north. We had quite good volumes, even in the tough last couple weeks, and we go now back into operation this and next week in Italy, also there looks like the curve is rather encouraging. I hope the same will happen in France. They are, I would say, two weeks later than that, and then we also plan here to ramp up our business accordingly.
Contrary to that, you have a situation in Germany, Switzerland, and Eastern Europe, where we have the construction sites fully operating. Also Austria went back with the construction site. This is such a fluid dynamic development and very important to follow up here on a daily and weekly basis in each market, and this is what we try to do.
Jan, a follow-up question. In France, do you have the full agreement of the trade unions for reopening the plants in terms of health condition and security?
If I may, Jean-Christophe, of course, we follow strictly the rules here, and we open only if we have all the agreements in place, including.
Okay
the ones with union,
of course.
Okay. Thanks.
The next question comes from Cedar Ekblom, from Morgan Stanley. Please go ahead.
Morning. I've got a question on the fixed cost savings that you're targeting for the year. Can you please confirm that none or very little of that fixed cost saving benefit was actually evident in the Q1 results? Can you give us a bit of color on how we think about the benefits of that fixed cost saving program actually coming through over the year? Is it more second half-weighted? I've got a question on Asia as well. Even if we exclude the year-on-year decline in the contribution from Huaxin, Asia Pacific still looks pretty weak. Can you give us some color on how much of the Recurring EBIT decline ex Huaxin is related to FX? Also just talk about what you're actually seeing in your Asia Pac business, ex what's actually happening in China. It looks like one of the weaker performances, even excluding Huaxin. Thank you.
Okay. Maybe to start with the cost reduction program. The cost reduction program we are committed to, as you know, to deliver at least CHF 300 million. As long as the volume have not recovered, we are monitoring all production cost and SG&A very carefully. This means maintenance. All teams are mobilized to offset what we see in terms of decrease in revenues. I would say that, yes, you're right. Very little savings for Q1. It's really starting and will be really impacting Q2 and then H2. I would say 50/50. That's about the proportion you can count on. We are full speed mobilized to deliver as much as possible fixed cost savings for Q2. Your question on APAC now. I think it's fair to say that APAC has been quite impacted by Huaxin, as I said.
Huaxin represents CHF 40 million drop in EBIT in the APAC performance. That I think important to note. Our own operation as well has been also, or two plants we have in Sichuan have also impacted the APAC region. All in all, China, in terms of impacting the EBIT results, account for a bit more than CHF 60 million. I think it's fair to say that without this impact, actually, we've done quite well in APAC.
Perfect. Thank you very much.
The next question comes from Nabil Ahmed from Barclays. Please go ahead.
Good morning. Thanks for taking my questions. I had two. The first one, maybe if you could help us to understand the drop through on EBIT, because we used to focus so much on EBITDA in the past, and also taking into account the cost initiative. Is it fair to assume around 30%? The second question is a follow-up on the CHF 300 million fixed cost reduction. Looks like it's mostly coming from procurement, but is there an implementation cost that is associated? Also is the CHF 300 million net of inflation or deflation in the case of energy?
Thank you. I think on the fixed cost saving, we don't plan to make a restructuring with big one-offs. We do all the measures we are taking, they basically have no one-offs. We have a lot of third-party contracts for maintenance or for operating the quarry. We have many of those things where we have already started six weeks ago to cut them and reduce all the cash out, and this you can expect from us. I think the CHF 300 million, they are of course not a constructed number with some inflation inside. We do the same as with our CHF 400 million SG&A cost saving.
We deliver that fully into the bottom line, and maybe I can tell you that we are very confident because we have started with the program a couple of weeks ago, that we will fully achieve that number or maybe beyond. Géraldine, you want to answer the first question?
I think you had a question on EBITDA and then EBIT. You have the full reconciliation in the press release, and also, as an appendix to the slides. Is there something specific about this you would like to answer?
No, I guess the question was on revenue drop through. If you take revenues at 100, they drop like 20%, what's the drop through on EBIT?
Most of our costs, majority of our costs are variable cost. That's how I would answer to this. We adjust our cost to the volumes drop.
The last question comes from Lars Kjellberg from Credit Suisse. Please go ahead.
Thank you. Just a couple of questions from me. One of the drives have been closing the gap to your peers in aggregates and ready-mix. You did not disclose any details on that business in the first quarter. If you can give us an update on your performance, how you're improving in that business, that would be helpful. Again, on the fixed cost component, I appreciate you're doing this, of course, as volumes are down. Should we expect some of these costs coming back if and when volumes improve? Just a very quick one also. When you talked about in your prepared remarks, China is one topic, production coming back. What about demand? You also mentioned some other positive sort of spots of business. If you can put any color to that would be helpful. Thank you.
Lars, what was the last point? I didn't fully understand the last question.
You, of course, mentioned China is obviously showing, taking a lead in the recovery, right? You also mentioned some positive signs in other markets, and if you could put any color to that?
All right.
what markets that would be.
Let me start with that. Yes, this crisis, every country is in different phase, and it's very important to learn the curve. At the moment, the curve looks quite alike. We have China, I think surprisingly for many people, with almost a full recovery already now end of April. Our factories are all back, not only to work, but the important demand level is back. Our people expect a volume in Q2 around last year, which I don't think many people expect this to happen. I don't want to speculate now what can happen with the virus or if there's a double dip, but just from a business side, I can just confirm the curve is very strong rebound in China. If I look then into other markets, here Switzerland, who has taken very strong measures, who was also influenced strongly by Italy on the Italian side.
Nevertheless, they managed to keep the construction sites running. There were some temporary closures in the Italian part, in the French part. That all has been reopening. Even Ticino, the construction sites are back this week. Also here we can confirm for this point in time, a positive curve. In Italy, we see the same. Construction business is coming back now. I think a lot of the other factories, which is important for supplying the construction sites for other products and cement, are also coming back this and next week. That's why I'm quite positive here with the curve. In North America, we have an interesting curve because not much was really shut down. Nevertheless, things moved ahead, and we had ongoing, very good demand with a few exceptions like Boston or with the terrible situation we have in New York.
That's why we are quite positive now on the curve and on the recovery, which we will see now in May and June. On the cost side, you have an interesting question if the costs are coming back, and what we believe is that actually, we will come back with a lower cost base. The world economy was running at quite a high speed over the last 10 years, many of our suppliers have confronted us with ongoing price increases year on year. I think this comes now to an abrupt stop, and we will operate now on reduced rates and prices, especially from the suppliers. As Géraldine has mentioned, most of our costs are variable. We're working hard now to come back with the reduced price levels, and therefore, cost levels.
Maybe on your question about aggregate and ready-mix margins, you will find that in H1 presentation. Q1, very small quarter.
I think, Lars, overall, our strategy stands there. Now we have this very tsunami type of disruption. We are in a very good situation to handle it with our balance sheet, our liquidity, our cash conversion discipline. The strategy might be even more beautiful if in the second half of the year, maybe we are in a position to make some good deals. The strategy stands there with exciting opportunities in aggregates, in ready mix, and then also solutions and products, our fourth segment.
Just if I can have a quick follow-up. The turnaround that you're seeing and clearly having strong business performance in the Africa, Middle East, what can we learn from that? What exactly is going on? Is there more upside to that?
Oh, thank you. Thank you for recognizing. Yes. We were promising that to you that we believe the Middle East, Africa was maybe not as good led as it should be. We have changed the leadership a bit more than one and a half years ago, and they put a strong program in place to have this profit and loss ownership and operate more entrepreneurial and more tougher in the markets. Even under these very difficult situations, and we had a sales drop of 7% in the first quarter, we were able to even increase the operating profit. This comes a little, for me, leadership, operational efficiency, what we have now implemented in Middle East and Africa.
Thank you.
Do we have any more questions, Swetlana?
I think we don't have any more questions remaining on the line.
All right. Thank you again. I know you're very busy in the reporting season. I really appreciate you took the time, and let's go to COVID-19 together, and I think we're going to see a strong second half of the year for building materials. Thank you very much and have a good day.
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