SNC-Lavalin pins hopes on U.S. infrastructure spending
SNC-Lavalin Group Inc. is looking to expand its footprint south of the border to capitalize on rising infrastructure spending by the U.S. federal government.
U.S. House of Representatives members are set to vote Wednesday on a US$1.9-trillion coronavirus relief bill that will include new spending for infrastructure and green energy. U.S. Treasury Secretary Janet Yellen has said President Joe Biden's package would provide enough firepower to fuel a “very strong ” economic recovery.
“For sure, the U.S. is a key focus,” SNC chief executive Ian Edwards said Tuesday on a conference call with financial analysts.
“We see significant potential to deepen our penetration into the U.S. market, and we believe there could be much larger infrastructure spending bills passed under the new Biden administration.”
U.S. revenue accounts for about 20 per cent of SNC's annual sales, Edwards said. With about 5,000 employees in that country, “we're not at the scale of our peers,” he added.
Edwards spoke after Montreal-based SNC said its fourth-quarter net loss more than tripled to $702.7 million from $202.9 million. Revenue fell about 14 per cent to $1.7 billion, SNC said in a statement.
Results in the latest period include $480 million of charges, which SNC took after reviewing outstanding litigation and commercial claims and reassessing ongoing infrastructure projects — such as Montreal's Réseau Express Métropolitain — in light of COVID -19. SNC had warned about the provisions last month.
Together, the Canadian infrastructure contracts represented about $1.8 billion worth of future work as of Dec. 31. A $1-billion portion will be completed in 2021, SNC said.
Two of the contracts — Ottawa's Trillium light-rail line and the Eglinton Crosstown project in Toronto — will be substantially completed in 2022, while Montreal's REM will be delivered in 2024, Edwards said.
SNC is in negotiations with customers to recover COVID-19-related costs associated with the Canadian projects, “which we think we're contractually entitled to,” chief financial officer Jeff Bell said Tuesday. The COVID -19 charge in the latest quarter was about $90 million.
“We're staying prudent in terms of not recognizing those revenues until we've got better clarity through either commercial negotiations or third-party arbitrations, if that's what's necessary,” Bell said.
After incurring a series of delays and cost overruns on fixed-price contracts over the years, SNC is shifting to a services- and project management-based model that executives insist will lower risks. SNC wants to expand its projects business in Canada, the U.K. and the U.S. through “risk-capped” contracts, Edwards said.
“They're moving away from larger-scale construction projects to be more focused on pure engineering services, which are more stable and have higher margins,” Chris Murray, an analyst at ATB Capital Markets in Toronto, said in a telephone interview.
With SNC's total backlog now at $10.9 billion, “we are really optimistic about a return to growth in our core geographies, particularly in the second half of the year,” Edwards said.
Key opportunities for SNC include potential contracts to manage nuclear waste and decommission power plants in Canada, the U.K. and the U.S., the CEO said.
In October, a SNC joint venture won a contract extension from the U.S. Department of Energy to manage radioactive and hazardous wastes stored in underground tanks at the decommissioned Hanford site in Washington state.
U.S. officials “have a really strong commitment to continuing to invest in that cleanup, with some very significant contracts,” Edwards said.
SNC's focus on project management and nuclear energy will get even sharper when the company completes the sale of its oil and gas business to Kentech Corporate Holdings of the United Arab Emirates in the second quarter. The companies disclosed the agreement Feb. 9.
SNC shares fell 6.1 per cent to $24.90 at close on Tuesday.