The Quebec government is adding its voice to those pressing SNC-Lavalin Group Inc. to execute a quick turnaround, saying the work needed to set the company back on course is “enormous.”
Quebec Economy Minister Pierre Fitzgibbon said on Tuesday the urgency for Montreal-based SNC-Lavalin to take drastic action to fix its business has increased. He said he supports the unusual move from the Caisse de dépôt et placement du Québec – SNC’s biggest investor, with a stake of about 20 per cent – to publicly criticize the company for “unacceptable” performance, and its call for a rapid reversal of the situation after the engineering company delivered more bad news on Monday.
The company had announced another profit warning and a new $1.9-billion charge on its oil and gas business, and unveiled the first steps in a new strategic plan to fix the business.
“The work to be done at SNC is enormous,” Mr. Fitzgibbon told Cogeco Media’s 98.5 FM on Tuesday. “We need to give the new CEO [Ian Edwards] a chance. I think Mr. Edwards can, I hope for the sake of Quebeckers, give back SNC its badge of honour. But it needs to be done quickly. And that was the Caisse’s message: The plan needs to be executed quickly. And everyone at SNC, including the board, needs to be mindful of shareholders, who are rightly shocked at what’s transpired.”
The Legault government had a heads up shortly before that the Caisse, which manages several public pension plans and has about $310-billion under management, was going to issue a formal reaction to SNC’s Monday announcement, but officials were not told the details, said a person familiar with the matter.
The Caisse’s intent with its public rebuke was to stress the urgency of acting fast to implement the plan – a message directed at the board, the person said.
Mr. Fitzgibbon spoke separately by phone on Monday to Mr. Edwards and to Caisse chief executive Michael Sabia to get a better understanding of the situation, said the person, to whom The Globe and Mail has granted anonymity because they were not authorized to speak about it to the media. Mr. Fitzgibbon told 98.5 FM he returned from holiday on Monday and his first call was to Mr. Edwards.
The minister told the station his government is ready to help SNC financially if needed. “A possible intervention could take place at some point. Right now it’s not required,” he said, because the company’s financial position will be strengthened with the sale of part of its stake in Ontario’s Highway 407 toll road.
SNC-Lavalin shares are plumbing lows not seen in 14 years since the company said on Monday that it expects “significantly lower results in 2019” than anticipated and withdrew its previous annual earnings forecast. It was SNC’s third profit warning since January.
The earnings reset by Mr. Edwards, who took over in early June after the sudden departure of Neil Bruce as CEO, comes just weeks after the company confirmed to investors it would post adjusted earnings before interest, taxes, depreciation and amortization in its main engineering and construction business of $900-million to $950-million for 2019.
Dave Taylor of Toronto-based Taylor Asset Management, which holds SNC shares among its investments, called for a complete overhaul of the company’s board, which is led by chairman Kevin Lynch, and a global search for a new CEO.
“Get rid of anybody that has been here through this whole [recent] piece,” Mr. Taylor said in an interview. “Anybody who was there for that 2019 guidance … should be gone.”
The engineering and construction company, hobbled by setbacks, also said on Monday that it will push toward more consulting work and stop bidding on contracts in which it agrees to execute a project for a lump-sum price and absorb cost overruns.
Mr. Edwards said lump-sum contracts have been the main cause of SNC’s performance issues and that retrenching to focus on its engineering, nuclear and infrastructure management services will strengthen the balance sheet and remove volatility. The company will work through the balance of its $3.2-billion backlog in lump-sum contracts and expects to complete the last two by 2024.
The transition to a services firm will take some time but is the “right move” to deliver predictable and growing free cash flow, Canaccord Genuity analyst Yuri Lynk said in a note to clients. He said SNC has generated negative free cash flow every year since 2012 because of lump-sum contracts, some of which used up hundreds of millions of dollars of working capital.
In separate research, National Bank of Canada analyst Maxim Sytchev said it may be “less onerous” to go through what could be a painful turnaround as a private company. “We see privatization as an alternative that is gaining legitimacy as the shares continue to languish," he said.