UPDATE SNC-Lavalin Fixed-Price Exit Could Boost Rival
STORY UPDATE AUG.1
Canadian design-build giant SNC-Lavalin Group Inc. said it will not bid on future lump-sum turnkey construction projects and will reorganize its infrastructure, oil & gas and mining building units into a separate business, announcing on Aug. 1 a $1.6-billion loss "attributable to shareholders" or about 9 cents per share.
That compares to a profit of $62.7 million or about 36 cents per share, a year earlier. The firm, traded on the Toronto exchange, said revenue from its projects unit that will manage its exit from fixed-price work fell about 36% to $536.2 million.
It said the loss. which included a $1.28-billion goodwill impairment charge, was mainly due to "higher forecasted costs to complete" two oil & gas and one mining lump sum construction projects in the Middle East, as well as two fixed price Infrastructure projects in Canada that are nearly finished. The projects were not identified.
It also reduced its quarterly dividend to 2 cents(C) per share from 10 cents (C) per share, the second cut this year. Quarterly revenue also fell 10% to $1.72-billion compared to the same period in 2018.
But the firm's engineering services business, which includes design and project management, infrastructure services, nuclear decommssioning and concessions, "recorded a strong performance," SNC-Lavalin said, with segment revenue up 11.4% compared to a year earlier, although its margin fell to 8.2% from 11.3%—with all sub-groups also recording falloffs.
SNC-Lavalin'es joint venture with Holtec International, called Comprehensive Decommissioning International, said July 31 it has secured its first commercial contract to decommission and clean up the Oyster Creek nuclear power plant in southern New Jersey, with work set to start this year. The site license and ownership have been transferred to the JV firm. It said it has similar arrangements pending at three other shuttered nuclear plants in the U.S.
"We have rapidly begun executing on a new strategic plan ... that is focused on de-risking the business and surfacing value in high-growth, high-performing areas," said interim CEO Ian Edward, who succeeded Neil Bruce in June and formerly led SNC-Lavalin's infrastructure operations.
The firm has confirmed to Canada's Globe and Mail newspaper that it has exited from at least four major Canadian infrastructure projects on which it was shortlisted: the $2.4-billion SkyTrain Broadway extension and $1.1-billion Pattullo Bridge replacement, both in Vancouver; the new Valley Line West light-rail line in Edmonton; and Montreal’s Lafontaine tunnel modernization.
In its results announcement, SNC-Lavalin said it will meet "contractual obligations of its current [lump-sum turnkey] projects, including full commitment" to the $4.8-billion Réseau express métropolitain (REM) light rail project under way in Montreal.
It reported about $2.4 billion of fixed-price contracts in current backlog, which was reported at about $12 billion as of June 30, up from $11.5 billion a year earlier. About $2 billion was added in quarter two.
The fixed-price departure could benefit Canadian peer firm Aecon, which reported about 42% of revenue in fixed-price work, based on comments from its CEO reported by the Canadian Press. The two firms also are teamed on several current projects.
Aecon had been eyed for purchase by a China-owned construction contractor, but the Canadian government blocked the deal last year.
SNC 'High Perform' Units Linked
SNC-Lavalin said its "high performing" nuclear, engineering, project management and O&M services work with strong growth potential, including the Atkins unit acquired in 2017, will become a new reporting group called SNCL Engineering Services (SNCL).
The firm said it is "exploring all options" for the resources group, particularly the mostly Saudi-based oil and gas work acquired in 2015 with its purchase of UK-based Kentz, which could include "transition to a services-based business or divestiture."
Fixed-price contracts, such as for the just opened Champlain Bridge in Montreal, are the “root cause … of performance issues,” said interim CEO Ian Edwards, who succeeded Neil Bruce in June. With the changes, he expected “a material improvement in the predictability and clarity” of results.
In a July 22 website video, he said: "I think the current model within our industry is broken," noting similar recent moves by other publicly held industry firms. He said the restructuring is "an enhancement of the future, not a redirection of the past."
The firm announced in early July a three-year master services agreement with a long-term client, Emirates Global Aluminum, for engineering and project management at two smelter complexes and an alumina refinery in the United Arab Emirates. No contract value was disclosed.
SNC-Lavalin also said it expects "significantly lower results in 2019 than previously anticipated, due in large part to lump-sum project "cost reforecasts" required at the end of its second quarter on projects in the oil & gas and metals sectors. The firm said it will be "aggressively pursuing its project claims."
The firm announced earlier this month that Nigel W.M. White will join the firm on Aug. 1 as its London-based executive vice president of project oversight reporting directly to Edwards to "drive consistency and assess risk," it said.
He is formerly Hong Kong-based executive director of Gammon Construction, responsible for operations and financial performance and also is a 20-year veteran of Balfour Beatty.
But with the announced results, the firm is withdrawing previously issued annual financial guidance for 2019.
At ENR press time on August 1, SNC-Lavalin’s share price had dipped to $14.67, which media reported as a 14-year low.
SNC-Lavalin’s largest investor with a 20% stake, the influential Canadian pension fund Caisse de dépôt et placement du Québec, in what is seen as a rare move, publicly urged the design-build firm's board and management to take “decisive and timely action” after the third consecutive quarterly loss.
"The decision to reorganize will allow SNC-Lavalin to focus on the high-performing and growth areas of the business," the pension fund said.
The firm said it "remains on target to realize over $100 million(C) in cost savings by year end."
SNC-Lavalin said it will provide update on new strategies "in early fall."
Maxim Sytchev, construction sector analyst at National Bank of Canada, said "the market's main concern is the tail risk in executing EPC contracts," adding that "there are no specific references to the game-plan around insuring that $4.3 billion (C) of infrastructure and resources contracts proceed with no negative reforecasts." He also questions why there was margin falloff in the engineering group.
Sytchev is maintaining SNC-Lavalin's "outperform" stock rating but is watching project execution and continued funding, as well as employee retention as the firm exits lump-sum work. He speculates on the firm going private "to shield employees' morale from the day-to-day negative news flow."
SNC-Lavalin aims to earn more than $2 billion with sale of a 10% share of its lucrative Highway 407 concession in Toronto, which analysts speculate will be completed in the third quarter.