Aenza SAA (AENZ) 2015 Q1 法說會逐字稿

Good afternoon and welcome to Grupo Grana y Montero First Quarter 2015 Conference Call.

(Operator Instructions)

It is now my pleasure to turn the call over to Juan Carlos Gomez of i-advize Corporate Communications. Sir, please go ahead.

Thank you, Katie. Good afternoon, everyone. I'm very pleased to welcome you to Grupo Grana y Montero's First Quarter 2015 Earnings Conference Call.

This afternoon, the senior management team of Grupo Grana y Montero will discuss the Company's first quarter 2015 consolidated results for the press release issued on Tuesday, April 28. For a copy of the earnings release and more information available on the company, we ask that you visit the company's Web site at www.GranayMontero.com.pe , Investor Relations section, where there is also webcast presentation to accompany the discussion during this call.

I would like to remind you that this call is for investors and analysts only. Therefore, questions from the media will not be taken.

I will now introduce our speakers. Presenting on behalf of Grupo Grana y Montero are Mr. Mario Alvarado Pflucker, Chief Executive Officer; Mrs. Monica Miloslavich Hart, Chief Financial Officer; Mr. Luis Diaz, Corporate Operations Officer; Mr. Dennis Gray Febres, Corporate Finance and Investor Relations Officer; and Juan Manuel Lambarri, Corporate Engineer and Construction Officer.

During this call, management comments may give forward-looking statements, which are subject to various conditions that may differ materially. We ask that you refer to this disclaimer as guidance on these matters.

It's now my pleasure to introduce Mr. Mario Alvarado, Chief Executive Officer of Grupo Grana y Montero for his presentation. Mr. Alvarado, please go ahead.

Thank you very much. Good morning. Thank you for attending the first quarter results conference call. I will start by providing a general overview of the highlights for the first quarter of 2015.

In terms of GDP growth according to the Central Bank, Peru grew 1.3% in the first month of 2015. In the mainstream of economics, finance is expecting a growth of 4.2% for 2015 even though the average consensus is 2.8%. In terms of private investments, it is expected to decline to 0.9% once again for this year since gross projection continue to decrease and business [conscience] indicators are not improving.

The Group's backlog plus our current recurring business reached $4 billion in the first quarter of 2015. In addition, the backlog-to-revenue ratio is equivalent to 1.55 times. And when including backlog plus recurrent business, the ratio increased to 1.78 times. Monica will review in more detail the backlog figures for this quarter.

In terms of the more relevant development within the Group, it is important to mention the following - (inaudible) that they want us to pay Metro Lima complete an international corporate bond issuance and the (inaudible). The bonds were issued solid adjusted by inflation for an amount $620 million solid with a tenure of [3 or 4] years and an interest rate of 4.35%. Thus, the inflation investment. It is also worth mentioning that this rate was the lowest [position] in the market. The 25-day window of 2015, we presented 14 new [price incentives] which are added to the [four incentives] presented last year (inaudible) in priority and are continuing this process.

About the Metro Lima, we are currently in discussion with the Ministry of Transportation to expand the capacity of the Line 1 of Lima Metro. The Ministry objected to double the size of the fleet by 20 new trains (inaudible) capacity. (Inaudible) for the creation of the South terminal for Peru was declared void for the second year in a row. As you may recall, this currently passed the concession of the North and Central terminals for a period of 10 years. This was awarded last year. [With this], the result of the Lima [process] for the South terminal could lead to an extension of the existing contract we have for these terminals which starts July 2015. This product will have (inaudible) a negative impact in our result into the (inaudible). This project will be completed in June and we are currently in negotiation with the client and we're expecting to reach a successful agreement with them.

In February, we presented in a consortium with [Elrados] from Spain and [Incia] from Mexico an offer for the construction of Line 2 of the Metro Panama. We expect this project to be awarded in May of this year.

About (inaudible), we (inaudible) work to the facilities, one for coordination of plan and one for high volume increase in plan. I mean the main total investment for those place amounts $700 million that the one thing that we represented nobody else presented offers, and they will assign that project in (inaudible) process. Our improvement in the (inaudible) program condition have been improved within the purpose to contribute (inaudible) for the market - for the [Hodo] housing market.

Now, in April 5th, we started operation of [old] Blocks III and IV in the Talara Basin for 30 years taking into consideration that our [capital commitment] will begin in April 2016. So this year, we are only dedicated to the production of oil in both blocks. Today, our blocks are producing [3.4 thousand] barrels a day compared to 1.6 barrels per day with the use last April.

It's also important to mention that in the 40-day window of 2015, we presented 14 new initiatives - various initiatives which are added (inaudible) last year. I would encourage (inaudible) continue to grow.

Now, I would turn the presentation to Monica.

Thank you, Mario. Let's turn to Page 27. The revenue growth is explained mainly by the increasing revenues in the E&C segments and it's (inaudible) increase in revenue from one company acquired in December 2014. Additionally, revenue is increasing in Line 1 of the Metro considering at work with a total of trains in full operation. So yes, we've been increasing maintenance work and the accounting of the work progress for the second stage of (inaudible) water treatment plant as [ready].

On the other hand, the decreasing revenue in the oil and gas business is explained by the decline in crude oil in the first quarter of 2015 compared to the first quarter of 2014. This was partially concentrated by the increasing level of daily barrels produced and also the increasing production at the gas plant.

Finally, the decrease in revenue in the real estate segment is explained by the lower amount of units delivered in the first quarter of 2015. The decreasing gross profit in the E&C segment is explained by lower margins in chief works division and in (inaudible) division mainly due to the loss generated by Immaculada project. Additionally, [work execution] driven this quarter (inaudible) reports there is lower margin than projects executed during the same period of last year, which is partially offset by the margin generated by ongoing project of (inaudible).

In the infrastructure segment, the decline in oil price and the accomplishing of the ground work in the construction of (inaudible) as well as [Latida] with lower margins impacted the second gross profit. In the real estate segment, lower margins reported in the delivered housing units considering that during the first quarter of last year there was a higher deliver of units (inaudible) housing project whose margins were high.

On the other hand, in the technical service segment, the gross profit increased as a consequence of the recovery of (inaudible) impacted last year, through the conservation of (inaudible) with the regional government. Even though the general expenses increased in the first quarter of 2015 compared to the same quarter of last year is the same percentage in terms of revenue. Nevertheless, (inaudible) to review the expenses over the years.

Adding to the gross profit result, the operating income was affected by the execution of the letter of praise to the consortium for the [EPCM] (inaudible) consortium led by (inaudible) in which our participation was 15%. The increasing financial expenses is a consequence of increase of working capital in the E&C segment due to the delay in collecting from the clients and other processes as well as an increase of debt in the real estate segment for projects under execution.

The participation in associates includes the profits for the minority participation of the (inaudible) several of its project and the profit generated for the sales of a land (inaudible) property of interest. During the first quarter of 2015, the levels depreciated 3.6% against the US dollar and the [Chilean] peso 3.2% generated - generating a greater impact on the exchange rate differences into the quarter due to high liability in the results. As a consequence of the results explained above, the net profit of the first segment of 2015 was 75% lower than similar quarter last year and the EBITDA decreased 25%

In the next page, the company-related backlog and the (return) businesses reached a total amount of $3.9 billion in the first quarter of 2015. (Inaudible) ratio backlogs revenue for 1.65 and (inaudible) businesses ratio increases to 1.78. During the trimester, there were no important contracts awarded. Most of the additions to backlog are related to additional work of the contract under execution. This was directed impacted by the reduction of the private investment in the country and least consideration of the economy.

If we go to Page 9, as part of our [diversification] strategy, we have been expanding our operations in other countries. As you may see in the top right pie, that the amount of firm backlog has increased as a consequence of depreciation of what is going in Colombia with operations also in color. The proportion of oil and gas has increased due to the contract awarded for Block III and IV and (inaudible) with most of its contents in the oil and gas sector.

On the other hand, there is less proportion of mining and [contract] mining, inventory reduction in mining investment in the country. Construction business is still the main driver of our backlog has been defining the sector (inaudible). In central investment for the first quarter, the total amount reached $31.4 million divided in our four segments.

If we go to the next page in central [visit], looking at the third pie at the right side of the page. You can see the composition of the company debt. 48% of the debt is from the project financing (inaudible) loans and guarantees. 10% corresponds to the leasing to finance equipment -- the machinery for the operation and 42% is working capital that's associated to accounts receivables.

The [purchase] financing and leasing, finance investment and the operation of the company and we've been seeing increasing (inaudible) investment. The working capital debt has increased mainly due to the deterioration of the working capital in the E&C segment. An important part of the plan that I believe is coming afterwards is to recover a significant amount of the accounts receivables to review the sides (inaudible) during the year.

Now, I will turn the presentation to Luis who will explain the plans for this year.

Thank you, Monica. Action plan 2015, based on the growth of (inaudible) of our major markets and the reported results during the first quarter of 2015, an action plan was created to first improve the profitability of the business areas and second strengthen the financial position of the group.

To improve profitability in the business areas, we'd have identified the projects with the high operational risks within the four areas. These are projects to our management belief= there is a risk to underperform. With the objective of mitigate and avoid any potential [anomalies] -- advanced results we have defined both quick actions for each project in each Company.

We are also increasing our commercial efforts to improve our possibilities in order to secure success in the projects selected as targets in our commercial pipeline. Also, we have identified five projects with improvement opportunities for which concrete actions and plans have been implemented.

Regarding overhead, we have deployed optimization programs to all the companies of the good to reduce the [goal] 6.4 overhead margin. If we make a benchmark, we feel 5% should be a long-term competitive margin for a group like ours. To strengthen our financial position, we are taking actions to improve matters, recovery of work in capital position and optimization of data. We have initiated specific actions in the companies of the group where we have identified delays in collections.

Management of such companies is under direct negotiations with clients to speed up collections in these projects. The problems identified so far are related to closure of projects and in some case liquidity problems of the client due to market conditions. Finally, we are optimizing our capital investments we felt affecting neither growth nor operational costs. Also, as a consequence of the new [speed] of the real estate market, we are reducing our investment plans in these markets. So, we did two concrete actions we aimed to reduce the level of debts reported in March 2015. If we succeed in this plan, we expect to improve our profitability and strengthen our financial position, therefore, maximizing our investment capacity.

Now, we are ready for the process of Q&A.

Thank you, sir. (Operator Instructions).

Our first question comes from [Ana Sanzer] from Credit Suisse.

Hi. Good morning. Thank you for the call. Could you give us some insight as to what to expect in terms of new project in 2015 for the -- in [January] in construction segment. And also some guidance in terms of backlog also for these segments.

Thank you.

The thing is that we do not provide guidance but [we] can tell you in what is in the market. The market in the first quarter has been very, very slow in terms of new projects for being in the past in the beginning process and now we are entering in very important time of the year where a big group of projects are going to be big, the most important one is everything related to the Talara refinery.

I mentioned that we already present a four -- proposals that are part of that project and that associated with different companies and it appear to one nobody present the current. There wasn't much [only] that nobody wants to take. They are going to redo it and start the [beginning process] again on that one and also we have participated in the beginning process of the consortium of the main plan that's also very important for us.

Besides that, is that all employees that we are participating on one -- that is so important than [Metro] game -- the Metro de Panama is around $2 billion project. We have 32% participation one third. We are in a joint venture with them - they allowed to stand ICA from Mexico. And those are the -- like the main (inaudible) . oil [fields] that are under -- relay under segment space, but we cannot comment on those.

Thank you very much and also one more question for this segment. We have seen margins declining. Do you expect any projects to be delivered on lower margins or to historical margins? Thank you.

I would call you what has happened up to now. OK. We have had specially all the markets in -- as you may have [seen] in different countries how we view the margins because of the amount of projects that are within the investment point. So the competitive marketplace is as today are more difficult. At the same time, the clients are highly important of (inaudible) and they are also taking a lot their suppliers. So that -- like two supporters there in this [beginning in this] market.

Now, any -- there were so -- the leader had this semester -- this quarter, sorry, the value that two mainly the one employee. As I mentioned, there is no [collaborate] and we hope the future to be better and we are working on that the action plan that you've mentioned.

Thank you very much.

Our next question comes from Felipe Ucros from BTG.

Yes. Good morning. Thanks for the [space] and the call. Two questions on my side. The first one is regarding the Metro for Panama. I couldn't hear this very well. Maybe you mentioned it but if you haven't, can you give us an update of what you're thinking in terms of timing to be awarded that project? I think the last update I had was that it was supposed to be by end of this month but we haven't heard anything. So, maybe there is a new timeline.

Then the second question is on [Inmaculada], I understand that's going to be completed in June. So, at that point, numbers normalized somewhat but I was looking for some number -- some clarification in terms of numbers. So, if we can, one, measure how much the impact was this quarter, maybe also measure how much the impact will be next quarter, and how you think numbers will look once you've completed Inmaculada.

Where do you think the gross margins in E&C Division will be in this third quarter, once Inmaculada is out of the numbers? And in terms of the new plan that you have disclosed for this quarter where do you think or what improvement do you think you can achieve on EBITDA margins through this plan? Is there anything you can quantify there in the time?

Thank you.

It was very difficult to understand that coming from what we've had. Let me try to explain what I understood. It could not be -- I could not answer one of the questions basically would be [for me]. OK.

[But] about the Metro of Panama. They know official -- the position that they really where they are going to award it. The -- we -- is going to be made but it is not official maybe to June we'll know [about] this -- but this is already under evaluation and we are on that last stage of that. OK. So, we can look at precisely say when they are going to award these [prize]. With that -- that was the question?

That's perfect. The next question was about Inmaculada where you can quantify the impact this quarter and next quarter and how numbers will look once Inmaculada is out of the results. So, for example, third Q, how you see the gross margin for the E&C Division?

OK. Now, Inmaculada we're finished -- we are [aiming] to the first in June. OK. We have registered the [near] impact in our source used developers. Now, this way as a nation, this was the main convenient zone and we are currently in a direct [conversation] with the client and we are expecting to reach a subsequent agreement with them. OK. So, we knew that it's very difficult for us to comment more on this project because we are in the middle of an organization and as you could imagine it is not an easy one.

OK. And maybe you can tell us how the third quarter will look once Inmaculada is out of the numbers?

The third quarter, OK, again, that's I can even -- that is -- within Inmaculada, the numbers are going to be improve a lot. I cannot -- mention how much it is going to [reality] in there.

OK. I understand but do you expect the margins to come back to where they were before in previous years something like an 11% margin is achievable or you think those numbers are a thing of the past?

Well, in the -- I think the margin is not bad. The margin is going to be around 10% margin -- gross margin.

OK. I understand. Thank you.

(Operator Instructions)

Our next question comes from Adrian Huerta from JPMorgan.

Hi. Thank you, everyone. Good morning. My question just going back as well just to the Inmaculada. If you can just mention them, what would have been the margin in the first quarter excluding the contribution from this project? That's my first question. And then the second one, is regarding your debt. What are your plans to refinance your short-term debt? And if you can just comment, what is the average interest cost that you have today and finally regarding as well in the debt, in the worst case scenario, how much do you think you can reduce your debt this year? How much of that will come from a reduction in receivables and how much from a reduction in inventories?

Thanks.

First, I'm going to answer the debt, OK, and then the margin was the last. About the debt, we have made -- as you know, we are very conservative in terms of the debt. OK. So, what we have is we have the debt structure according to the cash [flow]. So, you have the debt of the project that's fully [financed] debt. That's the last, the most important part of the debt. Then we have the [leasing] of the machinery and that leasing of the machinery is paid by the rent from our own projects.

How do we make ourself sure that those leasing are going to be paid? It is because we only have around 30% to 40% of our own equipment, the remaining is rented. So, when speaking -- if there is a reduction in work, we first take out the -- where is the machinery. So, our machinery would have work.

And the third part is accounts receivable. As we mentioned, we have -- the short-term debt that we have is due to accounts receivable. So, we have more account receivables than the amount of debt. So, it makes no match of a term for that to fully and -- even though we have to [focus] from the bank, the following in a long-term because that debt is attached with account receivable from our clients.

So, we hedge in that way and we needed enough account deal more than it's there more than enough from the debt that we have. In the first quarter, the margin without Inmaculada does that mean below -- around [11%].

Perfect! Thank you. And what is the average cost of debt you're paying on your short-term debt?

It is 5%.

Perfect. Thank you so much. I appreciate it.

Thank you. Our next question comes from [Dario Valdizan] from Onyx.

Hi, Mario, Luis, Monica and everybody. Thank you very much for the call. Just a quick question regarding the account receivables. I know that you, right now, are evaluating trying to put it together an action plan but if you could give us a [scene] if when you look at your account receivables, what percentage do you think you're going to -- that you say in three scenarios write-off, it will improve gradually.

You will be able to collect or you'll be able to quickly collect, how will you divide those scenarios in terms of probability? And how long do you think that we will start to see an improvement on this point? That will be my first question.

OK. We thought from the -- that the amount of debt that we have, the account receivable, we believe that up today, we are not going to write-off any of them.

OK.

And now, we have analyzed some of the trends in terms of the credit [point] we have and the [problem] that they're hiring is the GMP and we believe that [gave us] -- that they will solve the problems and will pay us, OK? Now the problem is that whole country, is trying to do the same. They're doing efficiency forums and at the same time increasing the working capital, so it's like a bit cube that it has (inaudible) the ratings, due to this -- the scenario that everybody is working on. Like, perhaps -- like for example our action plan is because we have received that impact from the client that they have to stop and (inaudible) review [these people's] payment and (inaudible) here we're doing the same, right, everybody is doing the same.

So, it's like a -- like a (inaudible) or vicious circle but that is always like that way, no? And we believe that way is going to stop soon. We really worry that it will reduce drastically our working capital in GMP in the last month without taking in account new (inaudible) that are coming, that were [last], no? I'm talking about existing ones, OK?

OK.

Right?

Yes, I mean when I was looking in detail on those numbers, I was a bit concerned because obviously they're hurting your return on capital. They have consistently decreased from the second half of last year, sharply on the fourth quarter and have continued to this quarter to the point that it looks below your cost of equity. So, that is something that was raising our concern but I appreciate the explanation, understand the circumstances.

If I may just two questions, on the press release you were saying that you have to rethink things now with the real estate market and adapt to the new conditions. Does that mean that you're going to scratch off or rethink the San Martin Project? That will be my second question and then I have one last question regarding O&G.

OK, I feel something was (inaudible) I believe you're asking if we are going to rethink San Martin Project. We are -- we have received about San Martin Project is the approval of the -- of the signing of the [role], that if you inform the [highway] front that has to stop the break for a long time. It is already approved. So what we are doing in this, we're now -- is doing like any operate as a regular process because they already approved the controversial part.

Now we believe that we will continue as fast as we can on that (inaudible). Our partner -- the main partner of the -- of [employee] is a -- is a (inaudible) and it's also the same action and (inaudible) which the need to do as fast as we can. OK? We hope we start that project and we finish up with all the license and start by the -- by the first of next year.

OK, yes my question was because as you were saying in the press release that you have to rethink or adapt to new conditions in the real estate market. Project of -- the dimensions on San Martin, you're the expert and not me, but on the current conditions, that you see Peru seems very fetched, very aggressive. So, I was thinking I wanted to know if you were changing a little bit the structure of the project in a way they will become or will remain viable but again you guys are the experts not me is -- that's what I was asking.

No, the -- the comment that we have made about the estates and the reduction is about low income housing.

OK.

That is the one that has been affected a lot and also about that market, they disapproved the new relation that we believe will have an impact not necessarily right now but it will start building up again that.

Yes, understood. Now just to finish, thinking about this Luis is around -- I was looking O&G results and it's true that revenues came down 9% year on year for the GNP but that said, the cost of sales went up 22%, I wanted to understand what drove that increase in the cost of sales that affected your margin? If I compared to last year, then your margin went down from 36.6% on the first quarter 2014 to 15% this year. So, it was just very -- brought my attention that.

Hello?

(inaudible) secondary [law]. Yes, the main thing that there is an increase in the cost of sales in the oil and gas business, right?

Yes, if I look at the costs for GNC -- for GNP.

I can't give you the answer to that. The gas plant in the first quarter of last year was in very low -- in low operation. Therefore, the cost of -- the cost of the profits of the gas plant was very low in the first quarter. Now we have the gas plant (inaudible) with 30 million cubic feet per day. Therefore, the cost of operating the gas plant is included in the first quarter. We are operating at a double of capacity or production in this quarter. That's the reason why you have an increasing (inaudible).

What will be -- I appreciated that, that makes sense, what will be a gross margin because -- I mean I think we have discussed this before but one of the problems that GNP has and I know there's too much information to put in one single piece of paper is that we don't get a clear feeling of how the margins work for the [power] of the gas. So if you can -- just give me an understanding of what are gross margin for the gas plant in the (inaudible)? So, I can get a better understanding of my numbers.

The problem with it --

Because the oil production --

The [problem] with the gross margin of the gas plant is also tied to the price of the liquids that we produce, right. The main driver of the -- of the liquids, there is a LPG, so you have also the impact in sales today of the reduction of the prices of the LPG which unfortunately is not directly correlated to the oil price.

Right.

So, essentially it depends on the -- on the LPG price performance OK. The cost is very stable and is very tied to the amount of gas processed in the plant, OK. But what I really cannot predict is the LPG price because honestly I have try to make correlations between LPG and oil and there is no [correlation].

Can one use if I may, Luis, sorry taking so long, but can one use the prices published by Petroperu or those prices for O&G have not relation to what you -- to what your price is?

Yes, essentially the market -- the price -- yes the sales price that we are using, it's a little I will say [$]0.02 or [$]0.03 on top of Petroperu price at Talara refinery.

OK.

So the public price of the Talara refinery which is completely different than the one that we have in Lima. So we have to take care that we're looking at the right locations.

OK. I'll follow that later. Great, thank you very. I appreciate it.

Thank you.

Thank you. (Operator Instructions)

Our next question comes from Santiago Perez Teuffer from Credit Suisse.

Hi, thanks a lot of for your time and for taking my question. I'll try to be as brief as possible. Just basically how much of Morelco is [C&C] or was C&C this quarter and at what margins are those contracts coming? Thank you.

OK. Morelco, this quarter was $32 million. OK? In terms of revenues and in terms of the margin, it was 24%.

12% was it?

Excuse me?

Did you say 12%.

The margin is was 24%.

Which margin is this?

It's gross margin. The thing is you have to be careful with that margin because that's just (inaudible) ordinary income that was part of what we bought. OK?

OK and in terms of [reviewing] of margin. Do you have a number from Morelco?

EBITDA margin is where things are is also 24.2%. But again I have (inaudible) income.

OK, without extraordinary effect, how much -- what margin would you expect from Morelco?

The margin is going to be similar than what happens here around 10% and 11%.

OK, perfect, so typically there is --

(inaudible) in there construction contract.

Perfect.

Yes, gross margin.

And then just a followup on the -- on the [OMC] question. In terms of the projects that you spoke about and how you are seeing this 2015 action plan, as for mining projects on the side of the miners, we are seeing that is -- I mean it hasn't improved at all the way they are getting project. Tia Maria it's almost down or not coming together as you were expecting, so which specific project do you think you can capture in the next two years or how can we see these -- this branch, the [OMC] branch improving in the mining site? Thank you.

The main driver -- the main driver is going to be -- were related to gas or what we call oil and gas. They will have three big periods and that are coming in -- at [2031]. In Chile, there are hydroelectric and also in Colombia, oil and gas. It is the market that we think it is going to be creating jobs it's [employees].

OK and even despite the current oil price environment?

The oil what?

Oil price environment, oil prices around the -- I don't know -- 50 to 60 [hold at best]?

Yes, we couldn't understand. What was the question again?

That it's basically, do you believe that even with current oil prices, these projects will go ahead?

Ah (inaudible), yes, we really -- they are going -- go ahead -- the gas price no?

Yes, the Colombian oil and gas projects?

(inaudible) in Peru.

I think (inaudible) Morelco.

Are you talking about Morelco or you are talking about --?

No, no, no. Now, you spoke about hydroelectric project in Chile and then you said Colombia oil and gas projects, right, your main drivers?

The question is what for you are going to -- what is it (inaudible) to replace mining, OK? We believe in Chile hydroelectric is the -- probably the market that's going to continue growing. In Peru, gas and oil is very strong, refineries (inaudible) is coming in is very strong. And also it's in -- in Colombia, we'll continue doing that, mainly because we are doing in Morelco maintenance work for the pipeline and improvement for the operation. So, those are the two markets that I mentioned that we believe are coming.

Perfect. The followup with these markets specifically, as we saw in other -- in another projects, a lot of projects starting with the (inaudible) or remapped because of the current oil prices. The project that you are -- within your strategy to grow or to replace this mining market are not jeopardized by the current oil prices?

The ones that I mentioned are underway. There's always a risk on those projects but we are underway.

Great, thank you for your time.

Thank you. Our next question comes from [Ana Sanzer] from Credit Suisse.

Thank you for taking my second question. Could you comment a bit more on the real estate segment, to what do owe these results and if you're expecting a recovery in the affordable housing segment in the - in the short term? Thank you.

Yes, we have to be careful when [dealing] real estate that [the] way we account is the way, it depends on when we deliver it [upwards], not when we sell. OK? We, in the upper market, we had been selling, OK, but we are not going to deliver properties (inaudible) finish at the end of -- we have to finish and we are not going to finish that (inaudible) at the end of the year.

So even though we are selling, we are not going to be able to account for those projects in the upper market. In the lower market, it's more like many small projects because they have [phases]. So, it's not such a big impact like in the other one that -- one big project will make one big sale. And -- so that is -- that we believe is going to improve and also we are going to increase the amount of projects we finish for it to be delivered to the -- to the customers.

At the same time, we have some projects -- office projects that we already sold, but we cannot account because we have not finished them. They are on -- they are -- we plan to be finished at the end of the year on November or December. Those are [open to] employees. So in real estate, we are going to have like a jump -- a big jump in the moment of the year when we deliver those projects.

Thank you very much.

Thank you. Our next question comes from Paul Figueroa from Scotiabank.

Hi. Thanks for taking my question. Maybe if you can mention what is the impact on margins you are expecting due to the implementation of your action plan. I don't know if you have and if you made a number right now.

And my second question is also if you can provide an update on the (inaudible) project. I don't know if you are already in conversations with the Lima [consul]. We understand you shall be presenting the project very shortly to the Peruvian Minister of Finance. Thank you.

Along the (inaudible), we as we mentioned before, we have to do the traffic study according to the [new region] and then to send it to the -- to the Minister. We have not seen the traffic study. We finished already the old being the fields that -- that they require and now it's being processed and we should have that in the next weeks or on the next month and then with that, we have to present it, all documentation required to the municipality.

In the municipality, that's presented to the Minister of Economy. Not -- we will not have to do that. They have to get the approval from the Minister of Economy and that was what the impact of the E&C is [to wait at E&C] the action plan. We cannot provide guidance regarding this.

What I can tell you is that we definitely expect an improvement, face or gain [our] projections. OK. The impact of that action plan, we expect it to reach 1 or 2 points against our projects, but that's -- that's all that I can say about that.

OK. Thank you.

Certainly.

Thank you. Our next question comes from [Meyer Saba] from [Campus].

Yes, just one question. When I see the backlog of Morelco as of December 2014, I see we had nothing for 2017. Now, we have 19 million and also I see that there is like 8.5 million of contract annulments and the question is how secure or what type of contracts we have for Morelco.

It's as I see you have a redeployment of backlog towards 2017. Is that something that -- that the clients can do at what -- at what expense? How does it work?

Would you please repeat the question.

Yes. When you compare backlog for Morelco 2000 -- the end of 2014 and then the end of this -- this quarter, you see that there's a redeployment of backlog towards 2017, is that something that's -- how does -- how does the contract work, how does the client -- at what expense the client can redeploy backlog towards the end -- towards a different year?

Let me answer what I believe I understood, OK. At the end of 2014, we have 349 to be executed. We executed 32 million in the first quarter and we reduced 8.4 million due to exchange rate because now we are dividing it to a different exchange rate so that way the backlog is $[308] million now because we have reduced by an amount in the first quarter.

Now for the remaining of 2015, you have 157 million to be executed. Then you have 59 for 2016 and then you have 217 plus it's not 1 year, it's more than 1 year and it's the same contract. That is a maintenance contract that it goes more than 2017. That answer your question.

The first part, yes, but the second part, they are in the -- the -- it's the same backlog, which is redeployed to 2017 right?

Gentlemen, are you still on the line?

We have a contract there, a long-term contract with a capital of maintenance of the pipeline.

OK so it's not for a set date so that they can just move from 1 year to another?

They can use and move part -- part of this, but it has not been the case.

OK.

Thank you. (Operator Instructions)

Our next question comes from Andrea Padilla from Andino Asset Management.

Hi. This is Carlos Rojas. Thanks for accepting our call. I have two questions, one regarding again Immaculada, but I know you cannot tell us about that much.

I want to ask about Cerro del Aguila. We saw the reports of in [Kiam]. They already put something on their first quarter results about how much money it's going to cost. Do you have something of that in your first quarter results as well? And that is my first question.

We are going to see more losses regarding Cerro del Aguila in the future or everything is in the first quarter.

Immaculada, we already signed the agreement with them, but sorry Cerro del Aguila, we already signed the agreement with them and it in a way affected everything, but keep in mind that we continue doing the project. OK. It's important for it.

We believe we will not have more impact because of this project. Everything is a way in our numbers.

Great, and the second question is about your action plan. Who's going to be in charge of or responsible of implementing this action plan and regarding this, I don't see any sharp cost-cutting program or a reduction in personnel. Are we going to see that in the future?

[Yes, we have this in the first part we mentioned] our new organization that we have already instructed our organization with the (inaudible) for us to make sure that we are confident that we will be working through that and the most important part is that we have created I think the chief operating officer, I was [forgetting] the name, sorry and that is [Olivia Hartman] from first -- General First on that -- on that. She will be in charge of that. She will be following all the -- all the [forms] that we have.

Keep in mind that this -- all these projects that we have to reduce in cost to improve so we can really make is really going to be done in the operating companies what we are going to do as a group is we are going to follow this to be done by the end of (inaudible) years of each company.

OK. Thank you very much.

OK.

Thank you. Our next question comes from Dario Valdizan from Onyx.

Yes guys, sorry, yes a quick question I have forgot. On the backlog, you have included one line for the E&C called [Camp Peru], which was not there the end of last year, which looks to an adjustment up upwards for your backlog of last year, I'm a little bit curious can you explain to us about that and that of $40 million, $50 million, $49.8 million contract and also why it's not located or allocated, I'm sorry to actual camp on the (inaudible) [service], why is it allocated on the E&C side? Thank you.

Dario, this is Monica. The reason why [Camp Peru] today is reported in the E&C segment is because at the end of the year we sold the company to [GyM] only for tax purposes. We wanted to recover all the tax credit that we have in the company and through [GyM] we put new projects in the construction project will be more efficient.

OK. Perfect. That's clear. Thank you very much.

You're welcome. I would like to clarify (Meyer) your question. I don't know if you're still on the line.

There -- you're asking why we reported at the end of last year that Morelco's backlog only in 2000 so to be executed in 2015 and 2016 and then in the first quarter we have reported for the 3 years 2015, 2016 and 2017. It is the same backlog. The only thing is that considering that at the end of the year we have recently acquired the company we didn't have the exact proposition -- of this proposition of the backlog per year so we have corrected that in this report.

Thank you. At this time, I'm showing no further questions. I'd now like to turn the call back over to Mr. Alvarado for closing remarks.

I would like to thank you -- everybody for attending the call. We know that this has been a very fast quarter and we are going to work a lot to recover as we mentioned in our action plan. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.