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SNC-Lavalin Group Inc
Symbol SNC
Shares Issued 175,554,252
Close 2019-07-19 C$ 25.51
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SNC-Lavalin to reorganize resources, construction units

2019-07-22 08:04 ET - News Release

Mr. Ian Edwards reports


SNC-Lavalin Group Inc. is exiting lump-sum turnkey (LSTK) contracting and will reorganize the company's resources (oil and gas and mining and metallurgy) and infrastructure construction segments into a separate business line following continued poor performance of these segments. The company is also exploring all options for its resources segment, particularly its oil and gas (O&G) business, including transition to a services-based business or divestiture.

The decision to reorganize the company will allow SNC-Lavalin to focus on the high performing and growth areas of the business, which will be reported under SNCL Engineering Services. The company will fulfill the contractual obligations of its current LSTK projects, including full commitment to the Reseau express metropolitain (REM) and be reorganized as SNCL projects, while providing separate continuing operational and financial disclosure to the market on this business line.

The reorganization and exiting from LSTK contracting are the first step of the new strategic direction for the company that is focused on derisking the business and generating more consistent earnings and cash flow. Together with the recently announced sale of 10.01 per cent of Highway 407 ETR for $3-billion, the company's goal is to strengthen the balance sheet and enhance financial flexibility, while removing volatility. SNC-Lavalin will provide further detail on the strategy and host an investor day in early fall.

"Lump-sum turnkey projects have been the root cause of the company's performance issues. 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, and as a result we expect to see a material improvement in the predictability and clarity of our results," said Ian L. Edwards, interim president and chief executive officer. "We have a very impressive integrated professional services offering in EPDM, nuclear, infrastructure operations and maintenance (O&M), and Linxon, as well as a robust investment in capital, the results of which have been overshadowed by LSTK projects. Going forward, the reorganization will allow us to focus on leveraging growth opportunities and end-to-end project management capabilities that we have in SNCL engineering services, delivering consistent earnings and cash flow, with a leaner capital structure, to our shareholders."

The reorganization

The associated table presents the preliminary revised 2018 revenues and segment EBIT (earnings before interest and tax) figures, based on the new structure following the reorganization.

                                FOR THE YEAR ENDED DEC. 31, 2018   
                                        (in thousands) 

                                  Revenues                     Segment EBIT        
                                                    E&C     E&C %   Capital       Total

SNCL engineering services
EDPM                            $3,676,397      354,745      9.6%         -     354,745
Nuclear                            932,616      143,858     15.4%         -     143,858
Infrastructure services*           912,704       52,854      5.8%         -      52,854
Capital**                          264,657            -         -   224,975     224,975
                                 5,786,374      551,457      9.5%   224,975     776,432
SNCL projects
Resources (loss)                 3,001,365     (256,595)    (8.5%)        -    (256,595)
Infrastructure EPC 
projects (loss)                  1,296,267       19,298      1.5%         -      19,298
                                 4,297,632     (237,297)    (5.5%)        -    (237,297)
Total                           10,084,006      314,160      3.1%   224,975     539,135

* Includes infrastructure O&M, MENA and Linxon. The company will continue its unique, 
repetitive engineering, procurement and construction (EPC) offerings that are 
lower-risk standardized solutions with regard to district cooling plants and 
** The capital segment EBIT will reduce following the Highway 407 ETR partial sale of 
10.01 per cent. As the proceeds of this sale are to be used to reduce leverage, this 
will result in lower financing expenses.

Lower than anticipated second quarter results and goodwill impairment

The company expects significantly lower results in 2019 than previously anticipated, due in large part to LSTK construction project cost reforecasts required at the end of Q2 on projects in the resources (O&G and mining and metallurgy) and infrastructure segments. The company will be aggressively pursuing its project claims through the contracts' protocols. Due to the above, the company expects that the Q2 2019 adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) from E&C to be in the range of negative $150-million to negative $175-million. Complete details of the company's Q2 2019 results will be released on Aug. 1, 2019.

The company will be taking an additional non-cash, pretax, goodwill impairment charge and an intangible assets impairment charge relating to the company's O&G business, specifically Kentz, totalling approximately $1.9-billion. This non-cash charge is largely attributable to the company's decision to cease bidding on LSTK projects, as well as lower than expected performance by resources in the first half of the year.

Given today's announcements, the company is withdrawing all previously issued annual financial guidance for 2019.

It is important to note that the reorganization described above will reinforce the company's strong EDPM and nuclear segments, which will form the backbone of the SNCL engineering services business line. In 2019 the company's SNCL engineering services are expected to deliver segment EBIT margin consistent with prior periods. Now that the company is exiting LSTK contracting, the company will run off the vast majority (over 80 per cent) of its $3.2-billion of LSTK backlog by the end of 2021 with the remaining two projects estimated to be fully completed by 2024. The company expects that reasonably anticipated reforecasts in SNCL projects will be reflected in Q2 results. The company's objectives in relation to the SNCL projects reorganization are to mitigate risks and intensify the company's focus on claim receivables and recoveries while enhancing transparency on performance.

About SNC-Lavalin Group Inc.

Founded in 1911, SNC-Lavalin is a global fully integrated professional services and project management company and a major player in the ownership of infrastructure. From offices around the world, SNC-Lavalin's employees provide comprehensive end-to-end project solutions -- including capital investment, consulting, design, engineering, construction management, sustaining capital, and operations and maintenance -- to clients across the EDPM (engineering, design and project management), infrastructure, nuclear, clean power and resources businesses.

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