Exits Lump-Sum Turnkey Contracting
Q2 2019 Financial Results Lower than
Anticipated
2019 Financial Guidance Withdrawn
MONTREAL, July 22, 2019 /CNW Telbec/ - SNC-Lavalin
Group Inc. (TSX: SNC) today announced that it is exiting lump-sum
turnkey (LSTK) contracting and will reorganize the Company's
Resources (Oil & Gas and Mining & 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 & 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 fulfil the contractual obligations of its current LSTK
projects, including full commitment to the Réseau express
métropolitain (REM) and be reorganized as SNCL Projects,
while providing separate ongoing operational and financial
disclosure to the market on this business line.
The reorganization and exiting from LSTK contracting is the
first step of the new strategic direction for the Company that is
focused on de-risking the business and generating more consistent
earnings and cash flow. Together with the recently announced sale
of 10.01% 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 & 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 table below presents the preliminary revised 2018 revenues
and Segment EBIT(2) figures, based on the new structure
following the reorganization:
Preliminary
Revised Segment Disclosure(3)
(unaudited)
|
|
For the year ended
December 31, 2018
|
(in thousands of
Canadian $)
|
Revenues
|
Segment
EBIT(2)
|
|
|
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
|
3,001,365
|
(256,595)
|
(8.5%)
|
-
|
(256,595)
|
Infrastructure EPC
projects
|
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 regards to district cooling plants and
substations
**The Capital segment EBIT will reduce following the Highway 407
ETR partial sale of 10.01%. As the proceeds of this sale are to be
used to reduce leverage, this will result in lower financing
expenses.
Lower than Anticipated Q2 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 & 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 from
E&C(1) 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 August
1, 2019.
The Company will be taking an additional non-cash, pre-tax,
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(2) margin consistent
with prior periods. Now that we are exiting LSTK contracting, the
Company will run off the vast majority (over 80%) 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. We expect 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.
Our new strategic direction - Video message from the Interim
President and CEO Ian L. Edwards
The state of our industry – The Interim President and CEO's
viewpoint
About SNC-Lavalin:
Founded in 1911, SNC-Lavalin is a global engineering
professional services and project management company and a major
player in the ownership of infrastructure. From offices around the
world, SNC-Lavalin's employees think beyond engineering.
SNC-Lavalin's teams provide comprehensive 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, and Resources
businesses. www.snclavalin.com
(1) Adjusted EBITDA from
E&C is defined herein as earnings from E&C before net
financial expenses (income), income taxes, depreciation and
amortization, and excludes charges related to restructuring,
right-sizing and other, acquisition-related costs and integration
costs, the net expense for the 2012 class action lawsuits
settlement and related legal costs, the GMP equalization expense,
as well as the gains (losses) on disposals of E&C businesses.
The term "Adjusted EBITDA from E&C" does not have any
standardized meaning under IFRS. Therefore, it may not be
comparable to similar measures presented by other issuers.
Management uses this measure as a more meaningful way to compare
the Company's financial performance from period to period.
Management believes that, in addition to conventional measures
prepared in accordance with IFRS, certain investors use this
information to evaluate the Company's performance.
(2) Segment EBIT consists of revenues less
i) direct cost of activities, ii) directly related selling, general
and administrative expenses, and iii) corporate selling, general
and administrative expenses that are allocated to segments.
Expenses that are not allocated to the Company's segments include:
certain corporate selling, general and administrative expenses that
are not directly related to projects or segments, impairment loss
arising from expected credit losses, gain (loss) arising on
financial assets (liabilities) at fair value through profit or
loss, restructuring costs, impairment of goodwill,
acquisition-related costs and integration costs, amortization of
intangible assets related to business combinations, the net expense
for the 2012 class action lawsuits settlement and related legal
costs, and the GMP equalization expense, as well as gains (losses)
on disposals of E&C businesses and Capital investments. The
term "Segment EBIT" does not have any standardized meaning under
IFRS. Therefore, it may not be comparable to similar measures
presented by other issuers. Management uses this measure as a more
meaningful way to compare the Company's financial performance from
period to period. Management believes that, in addition to
conventional measures prepared in accordance with IFRS, certain
investors use this information to evaluate the Company's
performance.
(3) Numbers disclosed in the table reflect
the presentation changes that were made in Q1 2019 on the 2018
segment disclosures, as well as today's announced new structure. As
disclosed in the Company's Q1 2019 financial statements, effective
January 1, 2019, the Company changed
the definition of segment EBIT, its measure of profit or loss for
its reportable segments, to reflect a change made to its internal
reporting. As such, segment EBIT includes: i) the contribution
attributable to non-controlling interests before income taxes,
whereas in the past it excluded such contribution attributable to
non-controlling interests before income taxes; and ii) an
allocation to the segments of certain other corporate selling,
general and administrative expenses. The Company believes that such
inclusions improve the measure of profitability of its reportable
segments by better reflecting the overall performance of its
reportable segments. At the same time, the Company's simplified its
structure and resulted in a change to the Company's reportable
segments, which were: i) Engineering, Design and Project Management
("EDPM"); ii) Infrastructure; iii) Nuclear; iv) Resources; and v)
Capital. See Note 2C of Q1 2019 financial statements for more
details. The preliminary revised segment disclosure also reflects a
further split of the Infrastructure segment resulting from today's
announcement.
Forward-Looking Statements:
Reference in this press release, and hereafter, to the
"Company" or to "SNC-Lavalin" means, as the context may require,
SNC-Lavalin Group Inc. and all or some of its subsidiaries or joint
arrangements, or SNC-Lavalin Group Inc. or one or more of its
subsidiaries or joint arrangements.
Statements made in this press release that describe the
Company's or management's budgets, estimates, expectations,
forecasts, objectives, predictions, projections of the future or
strategies may be "forward-looking statements", which can be
identified by the use of the conditional or forward-looking
terminology such as "aims", "anticipates", "assumes", "believes",
"cost savings", "estimates", "expects", "goal", "intends", "may",
"plans", "projects", "should", "synergies", "target", "vision",
"will", or the negative thereof or other variations thereon.
Forward-looking statements also include any other statements that
do not refer to historical facts. Forward-looking statements also
include statements relating to the following: i) future capital
expenditures, revenues, expenses, earnings, economic performance,
indebtedness, financial condition, losses and future prospects; and
ii) business and management strategies and the expansion and growth
of the Company's operations. All such forward-looking statements
are made pursuant to the "safe-harbour" provisions of applicable
Canadian securities laws. The Company cautions that, by their
nature, forward-looking statements involve risks and uncertainties,
and that its actual actions and/or results could differ materially
from those expressed or implied in such forward-looking statements,
or could affect the extent to which a particular projection
materializes. Forward-looking statements are presented for the
purpose of assisting investors and others in understanding certain
key elements of the Company's current objectives, strategic
priorities, expectations and plans, and in obtaining a better
understanding of the Company's business and anticipated operating
environment. Readers are cautioned that such information may not be
appropriate for other purposes.
Forward-looking statements made in this press release are
based on a number of assumptions believed by the Company to be
reasonable as at the date hereof. The assumptions are set out
throughout the Company's 2018 MD&A, particularly in the
sections entitled "Critical Accounting Judgments and Key Sources of
Estimation Uncertainty" and "How We Analyze and Report our
Results". The 2019 outlook also assumes that the federal charges
laid against the Company and its indirect subsidiaries SNC-Lavalin
International Inc. and SNC-Lavalin Construction Inc. on
February 19, 2015, will not have a
significant adverse impact on the Company's business in 2019. If
these assumptions are inaccurate, the Company's actual results
could differ materially from those expressed or implied in such
forward-looking statements. In addition, important risk factors
could cause the Company's assumptions and estimates to be
inaccurate and actual results or events to differ materially from
those expressed in or implied by these forward-looking statements.
These risks include, but are not limited to: (a) outcome of pending
and future claims and litigation; (b) on February 19, 2015, the Company was charged with
one count of corruption under the Corruption of Foreign Public
Officials Act (Canada) (the
"CFPOA") and one count of fraud under the Criminal Code
(Canada), and is also subject to
other ongoing investigations which could subject the Company to
criminal and administrative enforcement actions, civil actions and
sanctions, fines and other penalties, some of which may be
significant. These charges and investigations, and potential
results thereof, could harm the Company's reputation, result in
suspension, prohibition or debarment of the Company from
participating in certain projects, reduce its revenues and net
income and adversely affect its business; (c) further
regulatory developments as well as employee, agent or partner
misconduct or failure to comply with anti-bribery and other
government laws and regulations; (d) reputation of the Company; (e)
fixed-price contracts or the Company's failure to meet contractual
schedule or performance requirements or to execute projects
efficiently; (f) contract awards and timing; (g) remaining
performance obligations; (h) being a provider of services to
government agencies; (i) international operations; (j) Brexit; (k)
ownership interests in Capital investments; (l) dependence on third
parties; (m) joint ventures and partnerships; (n) competition; (o)
professional liability or liability for faulty services; (p)
monetary damages and penalties in connection with professional and
engineering reports and opinions; (q) insurance coverage; (r)
health and safety; (s) qualified personnel; (t) work stoppages,
union negotiations and other labour matters; (u) information
systems and data; (v) acquisitions or other investment; (w)
divestitures and the sale of significant assets; * liquidity and
financial position; (y) indebtedness; (z) security under the
SNC-Lavalin Highway Holdings Loan; (aa) dependence on subsidiaries
to help repay indebtedness; (bb) dividends; (cc) post-employment
benefit obligations, including pension-related obligations; (dd)
working capital requirements; (ee) collection from customers; (ff)
impairment of goodwill and other assets; (gg) global economic
conditions; (hh) fluctuations in commodity prices; (ii) inherent
limitations to the Company's control framework; and (jj)
environmental laws and regulations.
The Company cautions that the foregoing list of factors is
not exhaustive. For more information on risks and uncertainties,
and assumptions that could cause the Company's actual results to
differ from current expectations, please refer to the sections
"Risks and Uncertainties", "How We Analyze and Report Our Results"
and "Critical Accounting Judgments and Key Sources of Estimation
Uncertainty" in the Company's 2018 MD&A, and as updated in the
first quarter 2019 MD&A.
The forward-looking statements herein reflect the Company's
expectations as at the date of this press release and are subject
to change after this date. The Company does not undertake to update
publicly or to revise any such forward-looking statements whether
as a result of new information, future events or otherwise, unless
required by applicable legislation or regulation.
SOURCE SNC-Lavalin