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SNC-Lavalin launches strategic review, tries to put cash draining contracts behind it

Click to play video: 'Global News Morning headlines: March 3, 2023'
Global News Morning headlines: March 3, 2023
Andrea Howick has the Global News Morning headlines for Friday, March 3, 2023

SNC-Lavalin Group Inc. saw fixed-price construction contracts drag down its results in its latest quarter, even as the company continues to pivot away from the loss-prone sector and undertakes a strategic review with an eye to optimizing its various businesses.

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

Chief executive Ian Edwards said Friday the company’s challenges with so-called lump-sum turnkey (LSTK) projects were largely behind it.

“As such, we are conducting a strategic review to further optimize our portfolio of businesses in order to focus on the successful growth we achieved in 2022,” Edwards said in a statement.

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Under his stewardship since June 2019, SNC-Lavalin has shifted its focus to engineering services and away from so-called lump-sum turnkey (LSTK) projects — fixed-price contracts under which companies must pay for any cost overruns themselves.

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

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

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Edwards said that with construction work virtually done, the associated problems — supply chain disruption, cost overruns due to inflation, labour disruption — are also in the past. Remaining work falls under “professional services” — systems testing, driver training, safety permits, regulatory approvals — and should involve fewer snarls, he said.

The Eglinton Crosstown LRT and Ottawa’s Trillium Line rail extension are the two major fixed-price contracts that bore the bulk of the company’s $150.2-million loss in adjusted earnings before interest and taxes in its LSTK segment in the fourth quarter.

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However, its engineering segment churned out sturdy numbers, accounting for 65 per cent of its $1.90-billion revenue. The total marked a drop from $1.94 billion in the same three months a year earlier.

SNC’s engineering segment boosted its backlog to a third consecutive quarterly record of $4.66 billion, versus $3.77 billion in the same period in 2021.

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

Bolstering its bookings sheet were recent government contract wins in the United States, including for highway design, floodplain mapping services and a design and engineering agreement to replace a Miami causeway following the destruction of Hurricane Ian last September.

Edwards said he sees potential in the massive funding injection from the U.S. government via the Infrastructure Investment and Jobs Act and the Inflation Reduction Act.

“We see a lot of it flowing through the transport side. We’re seeing some of it now flow through the energy transition side. And we’re also seeing quite a bit of it flow into what I would call water and environmental programs _ not just water quality but flood defense, remediation, drainage.”

He said SNC needs to expand its presence from “only a handful of states” to establish beachheads across many more.

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

“The resurgence of nuclear new-build power as a genuine green power and an alternative to other forms of green power is becoming a real realization to governments,” he said, calling the shift “dramatic.”

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

“Clearly the industry is about to take off and launch into a pretty fabulous opportunity, particularly for SNC-Lavalin.”

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

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

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