COVID-19 restrictions weigh on SNC-Lavalin results

MONTREAL • SNC-Lavalin Group Inc.’s past continues to haunt the engineering giant, and investors aren’t happy.

Montreal-based SNC on Friday reported a third-quarter net loss of $85.1 million compared with year-ago profit of $2.76 billion, when results were bolstered by the sale of a minority stake in Ontario’s Highway 407. The loss reflects a $58-million arbitration ruling against the company on a long-completed fixed-price construction project, which SNC didn’t identify, as well as lower productivity caused by COVID-19 safety protocols.

Investors reacted negatively to the news, pushing down SNC’s shares by as much as about 14 per cent in Toronto. The stock has now lost about 40 per cent of its value since the start of the year. It ended the day at $18.64, down 9.8 per cent.

Investors will be “disappointed by the continued lump-sum turnkey losses,” Benoit Poirier, a Desjardins Capital Markets analyst, said in a note to clients. He called the results “weak.”

SNC is in the midst of a strategic overhaul that has seen the company stop bidding on fixed-price construction work, focus on engineering services and slash overhead expenses by 40 per cent in the past year as it eliminated about 5,000 jobs. SNC, which had 10,100 employees as of the end of the third quarter, is aiming for a 75-per-cent reduction in overhead by the end of 2021, according to a company presentation posted online.

Executives offered few specifics on the contentious fixed-price construction project, other than to say it goes back to “the early part” of the last decade.

“This is a long outstanding project that’s been through an arbitration,” chief executive officer Ian Edwards told analysts on a conference call. “We’re really disappointed. This is a $58-million deviation from where we expected this to land.”

The ruling is “somewhat binding,” Edwards said. “So obviously that’s why we’ve taken the loss.”

While SNC feels its current risk-assessment processes are appropriate, the company is undertaking a further review of its remaining litigation matters involving fixed-price projects “to provide additional assurance,” the CEO said.

SNC’s backlog of fixedprice projects stood at $2.1 billion as of Sept. 30, including $1.9 billion in infrastructure work such as the Réseau Express Métropolitain in Montreal.

The company expects its three remaining Canadian light rail projects — the REM, Ottawa’s Trillium Line extension and the Eglinton Crosstown line in Toronto — will be “cash-flow positive over their life,” Edwards said.

Operations in the third quarter were hampered by COVID-19. Industry productivity as a whole has dropped 10 per cent to 25 per cent since the start of the pandemic, depending on the project and the activities involved, Edwards said.

The biggest impacts “tend to be on projects with extensive activities, including manual handling of materials, or working at heights, or in confined spaces,” he said. Additional hygiene breaks and travel constraints are also affecting productivity.

Negotiations are under way to recoup COVID-19 losses from clients, Edwards said.

All ongoing light-rail projects include “avenues of recovery through the contract, and we will pursue those,” the CEO said. “In the fullness of time we would expect to recover some of the loss that’s specific to COVID.”

Edwards insisted SNC remains on track to break even by the first half of 2021 and turn a profit next year.

“I firmly believe that we have the business focused on the right markets and the right geographies, and we’re taking the right road to achieve our future,” he said.