SNC-Lavalin Group Inc.'s biggest investor issued a rare rebuke of the company’s current direction on Monday, just hours after the Canadian engineering giant announced a shift in corporate strategy and provided a worsening picture of its financial health.
The disclosure prompted the Caisse de dépôt et placement du Québec – SNC’s biggest investor, with a stake of about 20 per cent – to say in a statement that it is worried about the Montreal-based company’s financial trajectory. In a shift of tone from its support for the company earlier this year, and a sign of growing impatience for its recovery, the Caisse urged SNC directors and managers to take bold and quick steps to reverse what it called “the current unacceptable trend of the business.”
“The deterioration of SNC-Lavalin’s performance … is a cause of growing concern,” the pension fund said in the statement. It does not usually comment on its individual investments. “The situation of the company requires decisive and timely action on the part of the board.”
Beset by troubles, SNC-Lavalin announced a new strategic direction on Monday. It will focus more on consulting for engineering projects and stop bidding for contracts in which it agrees to execute a project for a lump sum and absorb cost overruns.
Opinion: Caisse’s rebuke of SNC demonstrates it has lost patience with board
Opinion: Neil Bruce’s time was up at SNC-Lavalin and the new boss needs a new strategy
The strategic moves, the first under interim chief executive Ian Edwards since former CEO Neil Bruce departed abruptly in June, were overshadowed by new questions about the company’s finances. SNC issued its third profit warning on Monday since January, and disclosed previously unknown costs tied to some infrastructure and resource projects, although it did not say which ones. It also said its previous financial forecast for the year is no longer valid.
The Caisse is keen to preserve the company – which is vulnerable to a takeover bid as its stock price slides – as a Quebec-based champion, but warned the new strategic direction “must be comprehensive” and accompanied by a realistic plan to accomplish it.
A Caisse spokesman would not say whether the pension fund still supports SNC’s directors, declining to comment beyond the statement.
“It’s pretty stunning that the Caisse has gone public with this" given that it could simply call the company, said Louis Hébert, a specialist in corporate strategy at HEC Montréal business school. “It reinforces the message that they want action and they want it fast."
SNC now expects to post a second-quarter adjusted loss of $150-million to $175-million in its main engineering and construction business, while analysts had expected a profit of about $130-million. The company said it would also take a special non-cash charge worth $1.9-billion because of weaker-than-expected performance in its resources business and the decision to stop bidding on lump-sum contracts. It pledged to provide more details when it reports second-quarter earnings on Aug 1.
“The new CEO obviously felt compelled to reset expectations,” said analyst Maxim Sytchev of National Bank of Canada. “Ultimately, he only has one shot at setting the bar." Still, the magnitude of the new costs and the fact they relate to infrastructure work was a surprise, he said.
Mr. Edwards faces the daunting task of righting the SNC ship at a time of legal uncertainty, when political wrangling still hurts the business, risks associated with project execution remain high and employee morale is challenged, Raymond James analyst Frederic Bastien said. “Uncertainty, in our view, will continue to weigh on SNC for some time to come.”
The company’s shares closed down 6.7 per cent to $23.80 in trading on Monday on the Toronto Stock Exchange. The company has lost about half its market capitalization over the past 12 months.
SNC’s problems have multiplied since October, when it announced federal prosecutors would not negotiate a deal to settle bribery and fraud charges it faces. Its effort to get a settlement called a deferred prosecution agreement (DPA) became a political crisis for the Trudeau government.
The RCMP charged SNC-Lavalin and two of its business units in 2015 under the Corruption of Foreign Public Officials Act for allegedly paying $48-million in bribes to Libyan officials. Police also accuse the company of defrauding Libyan organizations of about $130-million.
A judge ruled last month there was enough evidence to proceed to trial. SNC-Lavalin has said it will plead not guilty.
In addition, a contract soured with Chilean copper miner Codelco, and the company faces uncertain prospects for getting work in Saudi Arabia due to diplomatic tensions between Ottawa and Riyadh. In May, SNC reported a first-quarter net loss of $17-million and said it planned to wind down operations in 15 countries.
Mr. Edwards told stakeholders on Monday that the time had come for the Canadian engineering giant to focus on its most profitable business lines and reduce risk. SNC explained that as well as getting out of lump-sum contracts, it will split into two operating units in a bid to highlight its better-performing assets, and explore options for its oil and gas and mining businesses, including a sale.
Mr. Edwards said lump-sum contracts caused the company’s performance problems. Ending such work should improve the predictability and clarity of SNC’s results, he said. Its lump-sum contracts in the past include some of Canada’s biggest infrastructure projects, such as Montreal’s new Champlain bridge.
This type of contract has been an industry staple for at least 15 years, but a shift in power from contractors to clients made many of them uneconomic, Canaccord Genuity Corp. analyst Yuri Lynk said in a recent report. Almost every engineering and construction firm with such contracts in their backlog have experienced major execution issues over the past three years, he said.
“I think the current model within our industry is broken,” Mr. Edwards said in a video posted to the company’s website on Monday. “Our future resides in moving ourselves towards a fully integrated professional services and management company.”
Analysts and investors largely applauded the company’s plan. But they cautioned that SNC will still need to finish $3.2-billion worth of lump-sum contracts, such as Montreal’s Réseau express métropolitain light-rail project, which could mean more costs.
Nicolas Van Praet