SNC-Lavalin cutting costs amid pressure to meet targets

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SNC-Lavalin Group Inc. is implementing a new round of cost-cutting amid mounting pressure on the engineering giant to meet its financial forecasts for the year.

Chief executive Neil Bruce and chief operating officer Ian Edwards sent a memo to SNC managers on March 28 ordering an immediate reduction in discretionary spending and a restriction on hiring. The directive includes a check on business-related travel and a ban on participating in conferences apart from exceptional cases.

The Globe and Mail received the memo anonymously. Daniela Pizzuto, a spokesperson for the Montreal-based company, verified the document’s authenticity on Monday, but did not provide further comment.

“As you can appreciate, 2019 is proving challenging so far,” SNC’s leaders write in the missive, noting that recent events are adding pressure on the company to meet its targets and deliver sustainable results. “At times like this, we need to consider all possible actions that are within our control.”

The cost-cutting measures underscore the extent to which Mr. Bruce and his leadership team are determined to protect the company’s investment-grade credit rating as they deal with challenges including the fallout from the termination of a mining contract with Chile’s Codelco, uncertain prospects in Saudi Arabia, and reputational damage from unresolved criminal charges. Many investors, such as Montreal wealth management firm Palos, have sold off their shares in the company in recent weeks amid the turmoil.

“When you have contracts that blow up in your face, you have to generate [money] somewhere else,” said Maxim Sytchev, an equity analyst with National Bank of Canada. “You have to offset top-line pressures with cost-cutting. That’s the only way.”

SNC-Lavalin expects to tally adjusted earnings per share between $2 and $2.20 on its core engineering and construction business for 2019, the company told investors on Feb. 22. Analysts are currently assuming the company will recover nothing from the $346-million loss it booked on the Codelco project earlier this year.

On Friday, SNC announced it clinched a deal to sell a 10-per-cent stake in the Toronto area’s Highway 407 electronic toll road for as much as $3.25-billion to the Ontario Municipal Employees Retirement System. Current 407 shareholders Ferrovial SA and Canada Pension Plan Investment Board have the right to match the offer.

The size of the stake being monetized by SNC is larger than investors expected, while the price the company was able to get was slightly less than anticipated.

The disappointment is reflected in SNC-Lavalin share price, which has lost ground in each of the past two trading sessions. It closed on Monday down about 0.2 per cent to $33.86 on the Toronto Stock Exchange.

“What should have given SNC-Lavalin’s stock a jolt of life struck like a wet towel instead,” Raymond James analyst Frederic Bastien said in a research note. “For all this fancy talk about asset crystallization and valuation reset over the past six months, we find the agreed upon purchase price somewhat underwhelming.”

SNC has said it intends to use the proceeds from the 407 stake sale to pay down debt and weigh other moves such as share buybacks. With the 407 stake reduced, the performance of SNC’s engineering and construction business grows in importance as the market tries to value the company, Mr. Sytchev said.

“Just because the balance sheet is repaired doesn’t mean that you can relax. That’s not the issue here,” the analyst said. “[Engineering and construction] execution is the number one priority."

SNC-Lavalin employed about 52,400 employees at the end of 2018, including about 9,000 in Canada.