Due to poor segment performance, SNC-Lavalin Group Inc. is exiting lump-sum turnkey (LSTK) contracting and reorganizing the company’s resources and infrastructure construction segments into separate business lines, exploring all options for its resources segment with oil and gas, including a transition to services-based business or divestiture.
The decision to reorganize will allow SNC-Lavalin to focus on the high-performing and growth areas of the business, which will be reported under SNCL Engineering Services. It 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 percent of Highway 407 ETR for C$3 billion (US$2,283,630,000.00), 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 CEO. “We have a very impressive integrated professional services offering in EDPM, 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.”
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 C$150 million (US$114,181,500.00) to negative C$175 million (US$ 133,215,594.75). 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, totaling approximately C$1.9 billion (US$1,446,280,000.00). 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 it’s exiting LSTK contracting, the company will run off the vast majority (over 80 percent) of its C$3.2 billion (US $2,435,840,000.00) of LSTK backlog by the end of 2021 with the remaining two projects estimated to be fully completed by 2024. It expects 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.
To find out more on how the company is restructuring visit its website.
