SNC-Lavalin to reorganize, turn further away from construction in favour of engineering
July 22, 2019 by Christopher Reynolds, The Canadian Press
MONTREAL—SNC-Lavalin Group Inc. is slashing its profit forecast for the third time this year as the company’s new CEO veers away from construction and oil projects to double down on engineering.
The beleaguered firm said July 22 it is quitting the competitive field of fixed-price contracts, which leave companies vulnerable to cost overruns. It is also “exploring all options” for its resources segment — including selling its flagging oil and gas business, which is taking on an additional $1.9 billion in impairment charges, SNC said in a release.
SNC shares fell seven per cent Monday to close at $23.80 on the Toronto Stock Exchange.
The company, dogged by ongoing fraud and corruption charges related to work in Libya and dragged into a political controversy in Ottawa earlier this year, has seen its market capitalization fall by more than half to $4.18 billion over the past 12 months.
“Incoming CEO Ian Edwards faces the daunting task of righting the SNC ship at a time when legal uncertainty prevails, political posturing still hurts the business, project execution risks remain high and employee morale is anything but,” said analyst Frederic Bastien of Raymond James in a note to investors.
The interim chief executive, who replaced Neil Bruce last month, acknowledged what analysts have noted for months. “Lump-sum, turnkey projects have been the root cause of the company’s performance issues,” Edwards said in a statement.
SNC-Lavalin’s gloomier financial guidance for its second-quarter was “due in large part” to cost issues on so-called turnkey contracts, where one company assumes responsibility for an entire project — from engineering through procurement and construction — and eats any cost overruns, the company said.
“By exiting such contracting and splitting it off from what is otherwise a healthy and robust business, we are tackling the problem at the source,” Edwards said.
The Montreal-based firm now expects to lose between $150 million and $175 million before interest, taxes, depreciation and amortization in the latest quarter — far short of analysts’ EBITDA expectations of up to $128 million — with results slated for release Aug. 1.
Quebec’s Caisse de depot, SNC’s largest investor at nearly 20 per cent, took the rare step of publicly rebuking the firm, saying the situation “requires decisive and timely action” by the board.
“The deterioration of SNC-Lavalin’s performance, as indicated in the company’s statement issued today, is a cause of growing concern for la Caisse,” it said Monday — a change in tone from chief executive Michael Sabia, who in February declared the pension fund a “rock of support” for the 108-year-old company.
SNC-Lavalin slashed its guidance for 2018 twice in three weeks earlier this year, more than halving its profit forecast and halting all bidding on future mining projects amidst a diplomatic feud between Canada and Saudi Arabia — a key source of oil and gas revenue — and delays on its Codelco mining project in Chile, which the state-owned copper company later cancelled at a cost of $350 million to SNC-Lavalin.
Neil Bruce, whose nearly four-year stint at the helm was marked by a 42 per cent plunge in share price and a political controversy tied to the ongoing corruption case, managed to bolster the company backlog by more than $15 billion.
He steered the firm through its purchase of engineering powerhouse WS Atkins in 2017, but also added oil and gas exposure in 2014 with the $2.1-billion acquisition of U.K-based Kentz Corp. Ltd.
“Essentially what they’re talking about with divesting the oil and gas business is, `Oops, we should just sell Kentz back to somebody else,”’ said AltaCorp Capital analyst Chris Murray said in a phone interview.
Oil and gas as well as mining are “more cyclical businesses, a little harder to judge,” he said. “And that’s where they’ve made mistakes in the past.”
The company’s oil and gas segment took in the second-highest revenues of any division in 2018, raking in one-quarter of SNC’s $10.08 billion. But it gleaned just 3.8 per cent earnings before interest and taxes, the lowest percentage of its four biggest divisions.
On Monday SNC-Lavalin withdrew its earlier financial guidance for 2019, which pegged EBITDA across its engineering and construction segments at between $900 million $950 million.
The company’s directional shift puts it closer to Quebec-based rival WSP Global Inc., a pure-play engineering design firm where nearly 90 per cent of revenues come from countries in Europe and North America. SNC-Lavalin, by contrast, derived nearly one-quarter of its 2018 revenue from operations in the Middle East and Africa.
The latest reorganization will split the company into two operating units. One is the “projects” division, which combines the resources and infrastructure construction segments “following continued poor performance,” SNC-Lavalin said in a release. The other is SNCL Engineering Services, which will oversee engineering design and project management as well as nuclear, infrastructure maintenance and capital, all of which accounted for 57 per cent of revenue last year.
“Although this decision is a critical first step in de-risking SNC and generating more consistent results, it still leaves the company on the hook for $3.2 billion worth of lump-sum turnkey projects” — including Montreal’s Reseau express metropolitain, analyst Frederic Bastien noted.
SNC-Lavalin told The Canadian Press it will withdraw from projects it’s been shortlisted for, including Vancouver’s $2.83-billion Broadway subway extension and a $500-million overhaul of Montreal’s Lafontaine tunnel, which runs under the St. Lawrence River.
SNC-Lavalin also faces a trial after allegedly paying $48 million in bribes to officials under Moammar Gadhafi and defrauding Libyan organizations of some $130 million between 2001 and 2012. The company was at the centre of a political controversy for months following accusations by former attorney general Jody Wilson-Raybould that top government officials pressured her to overrule federal prosecutors in the Libya case and negotiate a deferred prosecution agreement, a kind of plea deal that would have seen the firm pay a fine rather than face prosecution.
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