SNC-Lavalin begins strategic review, seeks to put cash-strapped contracts behind it IG News

Irshadgul News report,

SNC-Lavalin Group Inc. Eyeing an asset sale as the company continues to move away from cash-draining fixed-price construction contracts and up its game as a pure-play engineering firm.

“SNC will conduct a strategic review to optimize our portfolio of businesses,” CEO Ian Edwards told analysts on Friday’s earnings call.

He highlighted Linxon, a joint venture with Hitachi Energy that focuses on electrical substations.

Edwards said, “The first thing we need to do with the Linux business is get it back to profitability, which we believe we can do. And the second is to review all the options. I mean, Nothing’s off the table.”

He pointed to the company’s capital segment, whose holdings include a seven per cent stake in 407 Toll Road near Toronto.

As it settles its fixed-price contracts and improves free cash flow, “maybe the 407 becomes less important,” Edwards said.

“I wouldn’t say it’s in review immediately, but there will be a time when it’s in review.”

The engineering firm reported a loss of $54.4 million from continuing operations for the quarter ended December 31, compared to a loss of $15.3 million in the last three months of 2021.

Focusing on Engineering, Consulting

Edwards said the company’s challenges with so-called turnkey turnkey (LSTK) projects were largely behind this.

Under his leadership since June 2019, SNC-Lavalin has shifted its focus to engineering and consulting services and lump sum projects – fixed price contracts, under which companies must pay any cost overruns. It also sold its flagship oil and gas business till August 2021.

However, the company faced tough questions during a call with financial analysts about whether that cash drain was actually in the rear-view mirror, with one pointing to the interminable Eglinton light rail line in Toronto that has been under construction since 2011. Is.

“You’re 90, 95 percent complete … for three or four quarters now and suffered writedowns along the way. So what’s changed is that we’re going to see the backlog actually go to zero.” And this thing has finally been put to bed?” asked Canaccord Genuity analyst Yuri Link.

Edwards said that with construction operating virtually, the associated problems — supply chain disruptions, cost overruns due to inflation, labor disruptions — are also in the past.

Huge construction site below street level.
A Metrolinks station is under construction in 2019. SNC-Lavalin says most of the building is done and what remains should involve fewer snarls. (Martin Trainor / CBC)

The rest of the work falls under “professional services” — systems testing, driver training, safety permits, regulatory approvals — and should involve fewer snarls, he said.

The Eglinton Crosstown LRT, Ottawa’s Trillium Line and the Greater Montreal area’s REM light-rail network extension — work on the latter is three-quarters complete, SNC said — are the three major fixed-price contracts that bore the bulk of the company’s $150.2 billion . million loss in adjusted earnings before interest and taxes in its LSTK segment last quarter.

Union accuses SNC of unfair labor practices

The company also faces fresh allegations from a union representing its engineers, which says the firm was monitoring employees’ emails.

The Society of Professional Engineers and Associates says emails between union members and union employees triggered an automated “out-of-office” reply from the SNC manager, who was not included in the correspondence.

“In other words, it appears that private emails between union members and SPEA employees were automatically being forwarded to (SNC) Labor Relations. This was only discovered because of the ‘Out of Office’ feature,” the union said in a filing with the Canada Industrial Relations Board.

The allegation comes as part of a pair of unfair labor practice complaints to the board, which are ongoing.

SNC-Lavalin did not immediately respond to questions about the complaints.

Engineering segment has the highest revenue

SNC’s engineering segment churned out strong numbers, increasing its backlog 24 percent from a year earlier to a quarterly record of $4.66 billion. The segment accounts for 65 per cent of the company’s revenue of $1.90 billion.

The total declined from $1.94 billion in the same three months a year earlier.

Edwards said he sees the potential for massive funding injections from the US government through the Infrastructure Investment and Jobs Act and the Inflation Reduction Act.

“We see some of it flowing through the transportation side. We’re seeing some of it now flow through the energy transition side. And we’re also seeing what I’ll call water and environment programs — not only Water quality but also flood protection, treatment, drainage.”

He said that SNC needs to expand its presence from “only a few states” to set up many more beaches.

Edwards also noted renewed enthusiasm for nuclear power in the wake of Russia’s invasion of Ukraine, which sparked a full-blown energy crisis last year.

A concept image of the GE-Hitachi BWRX-300 Small Modular Reactor (SMR). Saskatchewan and Ontario are planning to build SMRs. (GE-Hitachi)

“The resurgence of nuclear new-generation power as a true green power and alternative to other forms of green power is becoming a real realization for governments,” he said, calling the change “dramatic.”

He highlighted new possibilities for SNC, citing a design-build deal signed in January for a small modular reactor at Ontario’s Darlington nuclear plant.

“Clearly the industry is about to take off and launch that as a very exciting opportunity for SNC-Lavalin in particular.”

On an adjusted basis, SNC’s professional services and project management operations reported a loss of 19 cents per diluted share in its fourth quarter compared to a loss of 15 cents per diluted share in the fourth quarter of 2021.

The figure was 187 percent below analyst expectations of 22 cents per diluted share in adjusted earnings, according to financial markets firm Refinitiv.


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