As SNC-Lavalin Group’s new CEO veers away from end-to-end construction projects as part of a sharp change in course, the Montreal-based company has confirmed it will finish out major projects already on its plate – including Ottawa’s Trillium Line extension.
The beleaguered firm said Monday it is quitting the competitive field of fixed-price contracts, which leave companies vulnerable to the cost overruns that large construction projects often generate. It will also combine its resources and infrastructure construction divisions into a separate business line "following continued poor performance," SNC-Lavalin said in a statement.
SNC-Lavalin said that the reorganization will allow it to focus on growth areas of the business, which will be reported under SNCL Engineering Services.
SNC-Lavalin's revised financial guidance for its second-quarter was "due in large part" to cost issues on so-called lump-sum, turnkey contracts, where one company takes on responsibility for the entire project, from engineering through procurement and construction, 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," interim CEO Ian Edwards said.
It will fulfill the contractual obligations of its current lump-sum turnkey projects, which will be reorganized as SNCL Projects, including Montreal's Reseau express metropolitain.
In an email to OBJ, an SNC-Lavalin spokesperson confirmed the company will also complete work on the second phase of Ottawa’s light-rail transit system. The company’s subsidiary TransitNEXT was awarded a $1.6-billion contract in March to extend the north-south Trillium Line to Riverside South and the Ottawa International Airport.
“We are committed to delivering on all our commitments. This includes SNC-Lavalin's work as TransitNEXT on Trillium project in Ottawa,” the company’s spokesperson said.
Edwards, who replaced Neil Bruce as CEO 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.
The Montreal-based firm now expects to lose between $150 million and $175 million before interest, taxes, depreciation and amortization in the latest quarter, with results slated for release Aug. 1.
The company added that it is "exploring all options" for its resources segment – including selling off its flagging oil and gas business, which is taking on an additional $1.9 billion in impairment charges, SNC said.
SNC shares fell nearly seven per cent to $23.75 in midday trading on the Toronto Stock Exchange.
Quebec's Caisse de depot, SNC's largest investor at nearly 20 per cent, expressed worry over the company's direction and said it "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.
The company 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 an ongoing corruption case, also bolstered the company backlog by more than $15 billion.
He steered the company through its purchase of engineering powerhouse WS Atkins in 2017, and increased its presence in the global oil and gas industry in 2014 with the $2.1-billion acquisition of U.K-based Kentz Corp. Ltd.
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 biggest four divisions.
Mining and gas, meanwhile, lost $345.6 million last year.
SNC'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, on the other hand, derived nearly one-quarter of its 2018 revenue from operations in the Middle East and Africa.
This reorganization comes after the company announced a strategic review and further streamlining last month, in an effort to keep a lid on costs.
The company appointed a senior executive to oversee big-ticket contracts and also said it would fold its hydro, transmission and renewables operations into its infrastructure unit, while its technology ventures would be integrated into various units.
SNC-Lavalin also faces a trial over accusations of fraud and corruption in relation to its business dealings in Libya. The company was at the centre of a political controversy for months after failing to secure a deferred prosecution agreement, a kind of plea deal that would have seen the firm agree to pay a fine rather than face prosecution.
– With files from OBJ's Craig Lord