Four months after being named SNC-Lavalin Group Inc.’s interim chief executive, Ian Edwards has been given the job. Now, he has to prove he should keep it.
The British-born operations expert, who took command of the beleaguered engineering firm on a provisional basis in June after the abrupt departure of Neil Bruce, was officially announced as SNC’s new CEO Thursday. The appointment is a vote of confidence from a board that says he has acted “swiftly and decisively” to reverse the company’s slide and open a path back to growth.
Financial results from Montreal-based SNC-Lavalin support the board’s faith in Mr. Edwards. On Thursday, the company reported a quarterly profit for its main engineering business that exceeded analyst expectations.
But the hardest work still lies ahead as the CEO tries to remodel SNC’s business lines, close out billions of dollars worth of higher-risk construction contracts, and figure out what to do with its volatile oil and gas assets. A trial for charges of bribery and fraud linked to its business in Libya between 2001 and 2011 also looms.
SNC shares surged 20 per cent Thursday on the Toronto Stock Exchange to close at $23.81, clawing back ground from a multiyear low of $15.47 in early September.
“Investors were fearing the worst,” National Bank of Canada analyst Maxim Sytchev said. The possibility that the company would breach its loan covenants was among the concerns that did not materialize, he said.
Caisse de dépôt et placement du Québec, SNC-Lavalin’s biggest shareholder, said in August that the engineering firm needed to shake up its culture to improve project execution and halt its downward spiral. On Thursday, the pension fund said SNC was on the right track under Mr. Edwards.
“Since taking the reins of the company a few months ago, he’s clearly put emphasis on execution challenges,” Caisse spokesman Maxime Chagnon said. “That’s a good starting point for the work ahead.”
Montreal-based SNC-Lavalin reported a profit of $2.76-billion or $15.70 a share for its latest quarter ended Sept. 30, a result bolstered by after-tax proceeds worth $2.6-billion on its sale of a 10-per-cent stake in Toronto-area toll road Highway 407. Total revenue fell 5 per cent to $2.4-billion for the three-month period.
Earnings before interest, taxes, depreciation and amortization from SNC’s main engineering and construction business dropped 17 per cent to $184.9-million during the quarter compared with the same period a year ago. But that was better than the average $161-million analysts were expecting. The profit is adjusted to strip out charges related to things such as restructuring and integration costs.
“Whilst it is early days, this quarter demonstrates that the new strategic direction is actually delivering results,” Mr. Edwards said on a video posted to the company’s website.
The company had a backlog worth $11.4-billion at the end of September, up from $10.4-billion at the same time last year. It signed seven new service contracts worth roughly $500-million during the latest quarter.
“There are clear signs that the strategic plan … is beginning to take hold,” RBC analyst Derek Spronck said in a note to clients, adding that the 407 sale puts SNC in a good liquidity position with total recourse debt at $1.2-billion and cash of $934-million.
Mr. Edwards is trying to get the engineering and construction firm back on track after a cocktail of setbacks that have hit its finances and shredded its market capitalization.
The company has been hurt by losses from big contracts that have soured and is now exploring options for its resource assets while stepping up efforts to slash costs. The company is being hurt by continued weakness in its oil and gas business.
Those challenges have come at the same time the company has been thrust into the spotlight over its efforts to win a special deal to settle criminal charges related to its past business in Libya.
Canada’s director of public prosecutions has declined to offer SNC such a deal, called a deferred prosecution agreement. But the attorney-general still has the power to order one.
SNC remains open to such an agreement if the new Trudeau government pursues one but does not expect it, Mr. Edwards said Thursday. The company remains focused on defending itself through the court process, he said. A trial could start early next year.
Under Mr. Edwards, SNC is getting out of fixed-price construction work (what it calls lump-sum turnkey contracts) to focus on more fee-for-service consulting and nuclear work, which have higher profit margins. Lump-sum contracts, in which builders are responsible for cost overruns, have been “the root cause” of the company’s recent financial trouble, Mr. Edwards has said.
The CEO has tried to reassure stakeholders that his team has a good handle on the remaining fixed-price construction contracts, worth roughly $3.2-billion at the end of the third quarter. Most of what’s being worked through are transit contracts in Canada, such as Toronto’s Eglinton Crosstown light rail – the kind of projects that have traditionally gone well for SNC, Mr. Edwards said.
But there are also about $500-million worth of oil and gas projects to complete, he said, and those do not have a history of turning a profit.
The company has not provided a worst-case estimate for potential future losses. That has driven investors’ worries about the company’s cash flow and earnings this year and next.